Buying land allows you to build the home of your dreams or preserve a slice of nature. However, land can be expensive, so you may need a loan to fund your land purchase. Although you might assume that land is a safe investment-after all, “they’re not making any more of it”-lenders see land loans as risky. ? ? ? ? As a result, the approval process can be more cumbersome than standard home loans.
- Land that you intend to build on soon
- Raw land that you don’t expect to develop
Land loans can be relatively short term loans, lasting two to five years before the balloon payment is due. However, longer-term loans exist (or you can convert to a long-term loan), especially if you’re building a residential home on the property. ? ?
- Lenders are often most willing to lend if you buy a finished lot or plan to build on the land you buy, because that adds value to the property.
- Local banks, credit unions, or a second mortgage on your home are good sources of funding if you are not planning to build on the land you buy.
- Other sources of funding include commercial lenders, specialized lenders, or financing from the current owner.
- You will need to get a survey of the land, check the title, and budget for additional costs such as taxes, insurance, building costs, and permits.
Buy and Build in One Step
Lenders may be most willing to lend when you’ve got plans to build on your property. Holding raw land is speculative. Building a structure is also risky, but banks could be more comfortable if you’re going to add value to the property (by adding a home, for example).
You might be able to use a single loan to buy the land and fund construction. That approach allows you to suffer through less paperwork and fewer closing costs. What’s more, you can secure funding for the entire project (including completion of the build). You won’t be stuck holding land while you look for a lender that might never materialize.
To get approval for a construction loan, you’ll need to present plans to your lender, who typically wants to see that an experienced builder is doing the work. Funds will be distributed over time as the project progresses, so your contractors will need to follow through if they expect to get paid. ? ?
The Loan Features
Construction loans are short-term loans, often featuring interest-only payments and lasting less than one year. (Ideally, the project will be completed by then.) After that time, the loan may be converted into a standard 30-year or 15-year loan, or you’ll refinance the loan using your newly built structure as collateral.
Plan to come up with 10% to 20% of the future value of the home. You can experiment with the numbers using our mortgage payment calculator.
Finished Lots vs. Raw Land
If you’re buying a lot that already has utilities and street access, you’ll generally have an easier time getting approved.
You can finance raw land, but lenders may be hesitant (unless that’s typical for your area-for example, some areas rely on propane, wells, and septic systems). It’s expensive to add things like sewer lines and electricity to your property, and there are numerous opportunities for unexpected expenses and delays. ? ?
If you’re buying a lot (in a developing subdivision, for example), you might be able to put down as little as 15% or 25%. ? ? For raw land, plan on a minimum of 30% down, and you may have to bring 50% to the table to get approved. ? ?