What are the Options for Purchasing Land?
Though purchasing land is a similar process to purchasing a home, there are important differences that you should be made aware of prior to jumping into the market. At Edge Realty, we’re here to provide key resources for buyers who are ready to jump into the modern real estate market. If you’re ready to purchase a plot of land, we’re here to make the process a little easier!
Understanding The Different Types of Land Loans
When purchasing land, one of the first steps in the process is acquiring a land loan. It’s essential to understand the differences between the main land loan types.
Lot Loans
Lot loans are a type of loan that you’ll take out when looking to purchase a portion of land with eventual plans to build on it. These loans tend to have higher interest rates and larger down payments. This reflects the loans’ high risk characteristics if the land purchased isn’t immediately able to generate income.
Construction Loans
Construction loans are perfect for those ready to build on the plot of land right away. A construction loan covers both land purchase and construction costs. These loans are short-term, and can eventually be converted into a standard mortgage after construction is complete.
However, keep in mind that the approval process of a construction loan will be dependent on the borrower presenting detailed building plans and timelines for the construction project.
Raw Land Loans
Land purchasers take out a raw land loan when purchasing a plot of undeveloped land. This loan is the riskiest for the lender, which will result in higher interest rates and high down payments. As a requirement for the approval process, the borrower will need to present a completely fleshed out and detailed development plan for the land being purchased.
Farm Credit Loans
A farm credit loan is only relevant when the land being purchased is for agricultural purposes in rural areas. These loans generally go out to farmers and investors in rural and agricultural businesses.
Understanding The Different Loan Repayment Options and Requirements
The terms and requirements of your land loan will change depending on a variety of factors. Factors such as loan amount, interest rate, repayment period length, credit score, debt-to-income ratio, and monthly payment amounts will all affect your loans terms.
Loan Amount
Your loan’s amount will vary based on the lender and the amount of land value.
Interest Rates
Fixed or variable interest rates will depict whether or not your interest will stay the same or increase over time. When taking out a loan, pay careful attention to the terms of your loan’s interest rates. The longer it takes to pay off a loan with variable interest rates, the more interest you accrue over time, and the more you will owe.
Repayment Periods
Repayment periods for land loans are actually shorter than repayment periods for traditional mortgages for homes! Keep this in mind when purchasing a plot of land and taking out a land loan.
Credit Score
Your credit score will significantly influence your loan eligibility and interest rate options. Make sure to do research on what loans you’re eligible for before hitting the market, and what their interest rates are. If you’re not sure what kind of loans you’re eligible for, a member of the Edge Realty team can help you find that out.
Debt-to-Income Ratio
DTI, or debt-to-income ratio, measures the portion of your monthly income that will go towards paying off the loan debt that you are taking on. It is recommended that you have a lower DTI, which is reflective of better financial wealth, and will improve your chances of getting approved for loans.
Loan Options Vary by Location
The location of the plot of land that you intend to purchase will influence the availability of different loan options, terms, and eligibility.
Regulatory environments, which are areas where loans are shaped by state and local laws, can have unique programs and promote the creation of certain types of land development. This means that these loans will dictate what you can do on the plot of land you’re purchasing.
Market conditions will change based on the loan type in a certain market area, such as rural vs urban areas with residential vs commercial loans.
Government programs, like USDA loans, can provide better terms in qualified areas for those who are eligible. These programs can help make it easier for someone who wouldn’t otherwise qualify for certain loan types.
In Conclusion
Purchasing land can be a confusing process. Just like buying a home, there are multiple ways you can acquire a loan based on your financial standing, and multiple ways you can go about paying that loan off. However, unlike purchasing a home, the loan you receive can be dependent on the intended use of the land you’re buying, what kind of land you’re buying, and where the land you’re buying is.
If you have questions about the land buying process, Edge Realty can help! Give us a call at 501-843-4663 today, or fill out our contact form! A member of the Edge Realty team will be happy to help you navigate the land buying process.