Many open lots exist on the real estate marketplace, providing investors with many unique possibilities. For example, you can buy multiple blank lots and build high-quality housing for rent. Or you can develop commercial properties with new stores and other similar structures.
But can you get a mortgage for land? And if so, what guidelines must you follow? Please read on to learn more about land mortgages and loans. Understanding these factors will make finding one simpler. It will also improve your ability to develop land and create great real estate deals.
Can You Get a Mortgage for Land Without a Plan to Build?
Many real estate investors prefer buying land or lots instead of a completed building. Doing so lets them create whatever facility they want on their property. It also saves them money by cutting back on their initial real estate loan. They then use their land as collateral to get construction loans.
Creative and skilled investors can utilize this mortgage type to create many unique and fascinating design options. But, are they suitable for you? Let’s take a deep look at land loans and mortgages to give you a better idea of what kind of benefits they provide for you.
What is a Land Loan?
Land mortgages or loans provide cash for people buying property without any buildings. Lenders offer money for commercial, residential, or even industrial properties. The loans vary in percentage and amount, depending on the purchasing situation and things like collateral. They also consider the use of the land and other factors before deciding to grant a loan.
It would help if you had a good credit score to get the best possible rate. Each lender provides different expectations and guidelines for their borrowers. For example, some may ask for a minimum 750 credit score. Others may ask for specific types of collateral. You must provide income and debt information to show you can afford the property. The lender then checks on the land to gauge its quality.
Tell them how you plan to use the land, and they’ll look at zoning, land-use restrictions, and surveys. This information shows whether your land can be used in this way. You must explain your intended use of the land in detail. Lenders want to make sure that the loan is not risky. They may turn you down if they find your intended usage is unsafe or too dangerous for their needs.
Why might lenders turn you down?
Many reasons exist for denial. Understanding a few will help make it easier for you to choose this lending option. For example, you might be turned down if:
- Your credit score is too low, or your spending history questionable
- Your income doesn’t seem high enough to pay for developing the land
- Pollution or other problems exist on the ground that may limit its use
- The intended purpose for the land seems too unlikely or expensive
- Zoning or legal restrictions make your intended use impossible
- Potential concerns over utility access and other situations
- Lack of easy access to the property, which may require extensive work
- Landscaping concerns that may make the building more difficult
- Soil concerns that may make farming hard, such as a heavy clay density
- As you can see, most concerns center around your possible use of the land. Lenders need to know how you plan on developing the land to minimize their risk. They won’t give you a mortgage or loan if you don’t explain your usage. Some might deny you if you don’t have a detailed plan for its development. These plans often include things like:
- The type of buildings or facilities you plan on building on the land
- Methods you plan on using to develop the property to a higher level
- Utilities you will bring to the property to make it usable
- Potential sources of income to establish the land properly
Provide these details to your lender to make their job easier. They will then take various steps to verify the potential of your plan. We’ll talk more about this process later in this article.
Types of Land Mortgages to Consider
Let’s take a look at what types of land mortgages you have as options. All of them have specific requirements.
Raw Land Loan
As mentioned earlier, raw land requires development to use correctly. And raw land loans require a detailed description of how you’ll use the land. You’ll need to showcase every step of the development process to assuage the lender. Then, you’ll likely pay a sizeable down payment and need good credit. Thankfully, raw land costs less than developed property. So, you might still do well with this option.
Unimproved Land Mortgages
What’s the difference between unimproved and raw land? Unimproved land typically includes some utilities and amenities. However, it requires electrical and gas meters. Some also require phone boxes. Thankfully, lenders consider this land less risky than raw property. Therefore, they’re more likely to approve your loan. That said, you still need to provide a detailed description of the property’s use.
Improved Land Loans
Improved land includes most utilities, water, and easy access to roads. Some may even include landscaping and driveways from past buildings. These loans require the least down payment and provide better interest rates. In this way, they’re the easiest type for most people to obtain. However, improved land lots may be hard to find. As a result, investors often buy them very quickly when they’re available.
After buying property to develop, you need a construction loan. These include options like construction-to-permanent and stand-alone loans. The first type consists of all construction and mortgage costs. The second requires two different loans for each. Expect a down payment of at least 20% with this loan.
Benefits and Drawbacks of This Lending Option
Now that you know the answer to the question “can you get a mortgage for land?” you must gauge if it’s the best option for you. The many pros and cons of this lending option make it suitable for many people. So let’s take a look at these factors to make your decision easier to process and understand.
The Benefits of Land Mortgages
Land loans provide many advantages to a potential real estate mogul. Understand each of these benefits before applying. Doing so will help guide you through this process more efficiently. Knowledge is power in financial matters, and this information is essential to know.
Do you want to build a dream home that you can’t find anywhere else? Then, consider a high-quality land mortgage. Buy a blank lot, prepare it for construction, and then build the home you want. Otherwise, you’d have to pay to demolish an existing house, which is a waste of time and resources.
Most lenders will have unique land loan options available for you.
However, their choices often vary based on many factors. For instance, they may not specialize in land loans and have fewer available. Or they may limit their loans to a specific number each year. Talk to your lender to learn more.
Construction lenders often look to your credit history when deciding on your loan. An excellent land loan helps to make this decision easier. They’ll use the information on your loan to evaluate your lending situation. They’ll likely reduce your construction loan more readily as a result.
The Drawbacks of Land Mortgages
While we believe this lending option is a great choice, drawbacks do exist. They do not outweigh the positives, in our opinion. However, a fair understanding requires a grasp of potential issues. Let's take a look at the most common concerns to make this decision easier for you to handle.
Most land loans lack collateral that helps to calm lender’s nerves. Unfortunately, this may make getting a loan more difficult. It would help if you had exemplary credit and a clear development plan. Expect to apply a few times if you don’t have your plan in order right away.
Lenders often place higher interest rates on land loans due to their riskier nature. An excellent credit score will help a lot here. However, you may find interest rates vary wildly. We’ll take a look at some standard land loan interest rates below to make your decision easier.
Most lenders ask for a higher down payment for land loans. Their inherently riskier nature often makes this step necessary. On the other hand, this may be a benefit. A higher down payment does cut back on your monthly mortgage payments. However, some may not have the available cash.
Qualifications for a Land Mortgage
Lenders typically check three personal things when approving your land loan. These include credit score, DTI, and down payments. Expect more stringent demands for a land mortgage than you’d typically experience. These guidelines help weed out potential bad borrowers. Thankfully, most can be negotiated if you work with an understanding and adaptable lending partner.
You Require a Good DTI
Your DTI (debt-to-income) ratio indicates how well your income covers your debt. It calculates how much of your total income goes to cover necessary debts. Most lenders want a score no higher than 36%. Land mortgages follow this guideline. However, lenders may not provide a loan if you’re at or near this threshold. So, again, pay off your debt to minimize this problem and its impact.
You Should Pay a Good Down Payment
Most lenders expect a hefty down payment for a land loan. Expect, minimally, 20% of your total land cost. However, some lenders may ask for as much as 25%. Talk to your lender about this amount and try to talk them down a little. It may not work, but it is better to try and fail than not try at all. Don’t borrow money from a lender to make this payment. Doing so may create an odd financial repayment cycle.
You Need a Strong Credit Score
Lenders require a reasonably strong credit score for land mortgages. You’ll need at least 680-700 minimum to qualify. However, they may offer you weak loan terms or high-interest rates. So raise your credit before applying for a loan to improve your rates. Aim for a score of 725-750 for the best results. However, an even higher score will benefit you more. So pay off some debt and get your credit under control.
Interest Rates to Expect
Interest rates vary depending on the type of land you purchase. For example, lot land consists of clear and somewhat developed property that’s ready for construction. On the other hand, raw or recreational land requires more work to prepare and results in higher interest rates due to the higher risk. Let’s break down the possible interest rates for both to make this process easier for the buyer:
- 10-Year Fixed Loans – 4-5%
- 15-Year Fixed Loans – 4.3-5.3%
- 20-Year Fixed Loans – 4.6-5.6%
- 30-Year Fixed Loans – 4.65-5.65%
Raw or Recreational Land
- 10-Year Fixed Loans – 4.25-5.25%
- 15-Year Fixed Loans – 4.55-5.55%
- 20-Year Fixed – 4.85-5.85%
- 30-Year Fixed – 4.9-5.9%
As you can see, shorter-term loans heavily decrease your interest. However, your monthly payments increase. After all, you must repay your loan in a shorter period. Some investors can’t afford that kind of monthly cost. However, longer-term loans produce a higher overall payment cycle. Therefore, we’d suggest going with the shortest option you can afford to minimize an intensive repayment process.
Applying for a Land Mortgage
You may find working with a local bank near your potential property gives you a better chance of success. However, lenders around the nation may also work with you. Thankfully, you can apply for a land mortgage with minimal issues. Most lenders follow this simple application process:
- Talk to a community bank or credit union for the best chance of success
- Fill out the proper paperwork, which will vary based on your bank
- Submit your application, including the description of how you plan to use the land
- Wait to hear back, usually a three-day waiting process for most land loans
- Read the loan agreement sent to you in the mail, including the terms
- Decide if you want to accept their terms and sign it and return it to them
Denial may throw you off when applying for this type of loan. However, you can use it again and adjust the terms, such as offering a higher down payment. Most lenders will work with you to provide the help you need. If not, you may need to seek out another option. Thankfully, you should find a financial institution willing to work with you on this process.
Local credit unions often provide the best interest rates and terms. They may require a higher down payment, though. Talk to a few different options to gauge your best result. Bigger national banks also provide an excellent borrowing option. They may offer less attractive rates but may be more likely to approve your application.
As a result, you must search for a while before choosing a mortgage lender. Don’t pick the first option you find! Doing so is likely to disappoint you. Instead, do a little research, talk to lenders, and gauge their value to you. Follow the steps below, and you’ll improve your chances of finding a high-quality lender you can trust.
Finding a Great Land Loan
Reach out to various lenders to find a high-quality borrowing option for a land mortgage. They will discuss the multiple options available to you. They’ll perform all the steps described above to make this process easier. Most people find a lender reasonably quickly if they have good credit. Unfortunately, others may have a more challenging time understanding their options or finding a lender.
Do you have bad credit or can’t find a lender who trusts in your land development ideas? Download our app and sign up for a profile today. Set up your lending needs, search through various land loan providers, and reach out to each. Our app includes information on interest rates, application processes, and more. We also provide personalized search options for each of our users to improve these steps for you.
While we don’t provide the money for you, we do make it easier to find a lender. And sometimes, that’s all you need to improve your chances. So why not check out our app before applying for a land mortgage? You might be surprised at how much it helps you.
Final Thoughts on Land Loans
Don’t forget that land loans usually require a secondary source of financing to develop your property. All steps of this process lead to applying for this type of loan. After all, property in and of itself rarely provides a great return on your investment. However, developing it allows you to build your dream home or produce high-quality commercial store options. So get creative and have some fun!
Eric Benac is a freelance marketing professional with more than 10 years of experience. He stumbled upon the financial market during this time and fell in love with its many unique facets. He particularly enjoys writing content that helps working class people save money and improve their quality of life. In his free time, he enjoys listening to music, working on his latest sci-fi opus, composing and performing music, and being outdoors whenever possible. Currently, he has two books of music criticism to his name and lives in Lansing, Michigan.