Buying a home is a top financial goal for many people, but some individuals opt to purchase land initially. Owning land gives you the freedom to build a home, start a business, or do whatever you’d like. Land is also an appreciating asset and a valuable investment, especially in high-growth areas like Volusia County, Florida.
However, the process of financing a home purchase and financing a land purchase look a bit different. A home purchase is financed through a mortgage, but in order to buy land, you’ll need a land loan. Land loans aren’t nearly as prevalent as mortgages, and fewer lenders offer them in the first place. However, securing a land loan is totally possible, and it’s a valuable financial tool to help you achieve your goals. If you have your sights set on a beautiful Central Florida property, we’ll tell you everything you need to know about how to acquire it through a land loan.
How Land Loans Work
If you’re looking to acquire a piece of land, you can do so by obtaining a land loan (also known as a lot loan) from a lender. These are typically fixed-rate, closed-end installment loans. Unlike construction loans, which typically carry some obligation to complete a home build within a certain period of time, land/lot loans usually don’t care about such requirements. As a result, they are ideal for those who wish to purchase land and develop it at a later date. There are a few different types of land loans:
- Improved Land Loan
An improved land loan helps fund the purchase of a developed or “improved” lot. In other words, these loans fund the purchases of lots that have access to basic infrastructure such as roadways and utilities. Improved land loans are the most common type of land loan, and they’re also the easiest to obtain. They’re ideal for those who plan to build a property or a business on the land at some point down the road. - Unimproved Land Loan
Unimproved land loans can help you secure a partially developed lot. Unimproved land typically has access to some utilities but lacks basic infrastructure and is not ready for development. Because buyers will likely need to invest additional time and resources into developing the land, these loans can be a bit more difficult to obtain. - Raw Land Loan
Raw land is land that has no infrastructure and no utility access. It’s completely undeveloped. Obtaining a loan from a lender for raw land can be more challenging than obtaining one for developed land. Few lenders offer them, and in many cases, lenders will require you to build and submit a documented development plan as part of your application. Your lender may also do extensive evaluations including a feasibility study on the property before approving the loan. Remember, your lender doesn’t want to be on the hook in the event your plans don’t materialize.
Qualifying For A Land Loan
Securing a land/lot loan can be more challenging than securing a mortgage, in part because fewer lenders offer land loans. You can get them at many smaller community banks and credit unions. Since there is less competition among lenders, the bar to obtain a land loan can be high. In addition to an excellent credit score and in some cases a development plan, you’ll also likely need to put at least 20% down, if not more. Interest rates are usually higher on a land loan than on a mortgage as well. Land loans also have shorter repayment terms than mortgages and often range from 5 to 15 years.
If you are planning to build a house on the land, you’ll have the option of refinancing your loan into a traditional mortgage down the road.
Land loans offer a lot of opportunity to those who want to build a home or a business; however, these loans aren’t cheap, so it’s important to weigh the pros and cons. They are ideal for customers who have a clear vision and a thorough development plan that will ultimately result in enhanced value to the property.
If you’re looking to acquire land in Central Florida, give us a call at Palmetto Realty. As experienced local land brokers, we have the skills, expertise, and experience to find the right property for you and negotiate a favorable deal on your behalf. We’ll also guide you through the land loan process and help you avoid costly pitfalls along the way.