Though building a house can be costly, there are numerous ways to make it more affordable, especially if you are a first-time home buyer. One of these hidden resources is land loans. If you want to build a house, you will almost certainly need to apply for a land loan and recognize the value of educating yourself on the kinds of loans available to you.
What Is A Land Loan?
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A land loan is a type of loan used to fund the acquisition of a plot of land. It is used when a buyer wants to purchase land on which to build a home or do business.
If you want to get a land loan, the type you get will depend on where you plan to utilize it. Raw land loans, unimproved land loans, and improved land loans are the three most popular types of land loans.
Raw Land Loan
Raw land is simple to define. It is fully undeveloped land without any connections to utilities such as power, gas, or sewerage. Sometimes, it has limited access to roads.
If this is what you want, apply for a raw land loan. Funding for undeveloped land might be difficult to obtain, so you should come prepared. Lenders want to know how you plan to develop the site.
This will demonstrate that you are devoted to the project and do not constitute a significant risk. A substantial down payment and good credit can also improve your chances of qualifying.
Benefits of Purchasing Raw Land:
- Lower Purchase Price: Compared to renovated property, raw land is typically far less expensive.
- Flexibility: You can create anything you want in terms of design and construction.
- Possibility of Appreciation: Raw land might see a large increase in value once the surrounding infrastructure is developed.
Drawbacks of Purchasing Raw Land:
- Increased Risk: Developing undeveloped land can be dangerous, especially if you do not know the cost of infrastructure installation or zoning regulations.
- Financing Challenge: Obtaining a loan for raw land might be more challenging since banks and lenders view it as a riskier investment.
Improved Land Loan
Improved land, as opposed to raw land and unimproved land, has access to things like roads, power, and water. Because improved land is the most developed, it may be more expensive to purchase. Interest rates and down payments for an upgraded land loan, on the other hand, are cheaper than for a raw land loan or an unimproved land loan. Nonetheless, a substantial down payment and a strong credit score are still required.
Improved land, as opposed to raw land and unimproved land, has access to things like roads, power, and water. Because improved land is the most developed, it may be more expensive to purchase. Interest rates and down payments for an upgraded land loan, on the other hand, are cheaper than for a raw land loan or an unimproved land loan. Nonetheless, a substantial down payment and a strong credit score are still required.
If you want to build a house or a business, do not be discouraged. There are numerous ways of applying for a land loan and benefits. By far, the most significant advantage is the ability to design and build the home of your dreams.
Benefits of Purchasing Improved Land:
- Ready for Development: You may begin construction immediately, saving money and time on infrastructure.
- Easier Financing: Because rehabilitated land is viewed as less dangerous, lenders are more inclined to grant loans for it.
- Benefits of Location: Better land is typically found in more upscale or desirable neighborhoods, which can raise the value of real estate.
Drawbacks of Purchasing Better Land:
- Higher Purchase Price: Because the required infrastructure is already in place, improved property usually has a higher initial cost.
- Less Flexibility: What you may develop on the site may be restricted by zoning regulations or existing infrastructure.
Comparing the Two: Raw vs. Improved Land Loans
The two main differences between raw and improved land loans are related to risk factors and preparedness for development. Raw lands are easier to buy, but the development costs are higher in terms of price and time, meaning increased risks to the lenders. Improved land, however, is more expensive to purchase upfront but still holds fewer risks compared to raw land. It can be financed with less hassle.
Factors involved
- Purchasing Rationale: If you wish to build sooner rather than later, a better choice may be to purchase improved land because it is already developed and ready to build on. If you can afford to wait and your budget is flexible enough, raw land can appreciate greatly over the long term.
- Cost: Raw land probably costs more upfront, but factor in the cost of developing the property when calculating your overall budget.
- Financing: It is easier to get a loan for enhanced land. You usually need a bigger down payment when you are purchasing raw land and are also prepared for high interest rates.
Financing Options for Land Loans Compared to Improved Land
Land Loans: Financing the purchase of land is, in most instances, not comparable to financing a conventionally built home in terms of interest rates, down payments, and the tenure of the loan. The main reason is that of the risk element on the part of the lender. Raw or unimproved land entails much more uncertainty as far as when it will be improved or later resold is concerned.
Here is a breakdown of general terms for land loans.
Interest Rates: Because of the higher risk, these car loans generally have higher interest rates than home loans. The rates can vary drastically and depend on the type of land and the lender.
For instance, down payments should be anticipated a bit more, say 20% to 50% of the land’s value. A down payment on raw land might be a bit more than one on improved land.
Loan Terms: Land loans usually have shorter repayment terms than a home mortgage, such as 5 to 15 years. That is much higher than the traditional 30-year home loan each month.
Funding for Improved Land
You can still purchase improved lots through a land loan, but funding is easier if the land happens to be improved. Since the land has been upgraded, the likelihood of the lender giving better terms increases because the land is ready for immediate construction. What’s more, if you are building a house on improved land, you can qualify for a construction-to-permanent loan that has the cost of both the land and construction bundled into one mortgage.
Lower Interest Rates: Since improved land has more value and less risk, the lenders offer lower interest rates on such loans.
Lower Down Payment: The down payment for the improved land is usually lower, especially if you are going to build soon. You can even secure a down payment as low as 10% to 20%.
Long Loan Term: It is generally possible to get mortgages for up to 30 years if one is buying improved land and will consider construction, similar to the term of a traditional home mortgage.
Conclusion
The choice between purchasing raw land and improved land will be a personal one, guided by the individual’s goals, timeline, and budget. Raw land is the most flexible, offering perhaps the most appreciation, but it involves greater risks and development costs. Improved land is expensive in the short term but is convenient, more accessible to finance, and usable right away.
Consider your long-term plans. Check with a financial advisor or mortgage lender to determine possible financing options. To make an intelligent and informed investment, you will study the pros and cons of raw land and improved land; there are also two different loan types.
