Real estate transactions have two main components: the structure and the land. In most cases, the nature and location of the land will have a strong influence on the value of the house. A home on 40 acres is obviously going to have a different value than an identical home on four acres next door, or the same home on 0.4 acres in a historic neighborhood close to a city center.
There are many reasons why a savvy real estate buyer would choose to purchase land without a home already established. Perhaps location is your main consideration in a home purchase, and you found a lot with the perfect view of Mount Pisgah. Perhaps you want to build your ideal home from the foundation up, and starting with an improved lot is the way you want to go. Or maybe you see big potential in land near the upcoming freeway and you want to invest now.
Whatever your reason for buying land, there are a number of factors to consider that are different from a typical home purchase. Here are 5 things you should know before you secure a land loan.
1. Lenders are Generally Wary of Land Loans
Unlike a traditional mortgage, banks and other lenders consider land loans to be more risky. No, the land isn’t going to “up and disappear,” but your interest in it might. Borrowers are less likely to walk away from a home loan, and homes are easier to secure as collateral than raw land. For that reason, lenders that will consider land loans often charge a higher interest rate to offset their additional risk. If you’re asking for a land loan, it always helps to show you have a definite plan in place to improve the property and increase its value.
2. There are Different Kinds of Land
Banks aren’t concerned with geological formations or soil samples. But they are concerned with the nature of the land you want to purchase. Lenders throw a red flag on unimproved “raw” land, which they consider least desirable. Although more affordable overall, it’s harder to find a lender willing to finance your purchase of land that has had no improvements made. Most banks will require more money down (as much as 50%) and charge a much higher interest rate for a loan on raw land. On the other hand, lot land is considered much more favorably. Land lots, building sites zoned for residential construction, often already feature access to public roads and utilities. For that reason, typical lot loans only require 10–20% down.
3. It’s Important to do Your Homework
Whether you plan to build a house or start a farm, it’s important to know a number of things before you make an offer.
- Where are the boundaries? Ask the sellers to provide a recent survey or arrange to have one done. You won’t regret it.
- What easements exist on the land? What townships, utility companies, etc. have permission to use parts of your property? Knowing where sewer or cable lines are, for instance, will help you plan your plot. A title search will help you find those answers.
- How is this land zoned? There’s no point in buying farmland you can’t farm. Find out what your land has been zoned for and make sure it matches your intended use. It’s also important to know if your land is in a designated flood zone.
- What’s the land’s market value? Have the land appraised to compare its value with similar recent sales. This will help you determine what kind of offer to make.
4. Local Lenders are Your Best Bet
Local lenders may offer you similar restrictions as the big-name guys, namely larger down payments, higher interest rates, shorter loan terms. However, your local bank or credit union is going to have a more vested interest in local land, as well as a better understanding of its value—now, and potentially in the future. If you anticipate that it may be difficult for you to secure your loan, start with the local guys.
5. Don’t Forget about Additional Fees
Just like traditional mortgage loans, land loans incur a variety of fees over and above the loan itself. These fees are mandatory, and are used to cover the cost of the homework you did above. Additional fees include:
- Land Appraisal.
- Land Survey.
- Title Search.
- Title Insurance.
- Attorney Fees.
Start Looking for Your Dream Land Today!
All real estate is local. In order to make confident real estate decisions, we believe it is important for you to have timely and neighborhood-specific information. If you would like more information about buying land for business or residential purposes, our experts at Beverly-Hanks are here to help. Contact us today to speak with a Beverly-Hanks real estate agent about buying land in Western North Carolina.
10 Responses to “5 Things to Know if You Want a Land Loan”
My wife and I are thinking about buying some land close to our home, so thanks for sharing this. I like your point about making sure the land is zoned for what you intend to use it for. We’ll be sure to check what sort of things we can and can’t build on the property beforehand.
I like that you said that your local bank or credit union is going to have a more vested interest in local land, as well as a better understanding of its value. My dad is thinking about getting a land loan to start a farm because it’s something that he’s always wanted to do. I think that going with a local lender would be nice because they would probably give him a better loan in regards to the terms and conditions of it anyway while also knowing the local land better.
What are the local lenders that you could recommend for Hot Springs? Power and drive land already there. Barn and two bedroom cabin also. my wife is an architect so the custom design and establishment of the build team could take a year after closing. Thanks in advance…
Hey, Brad – We’re happy to give you a call. Drop us a line at [email protected] and we’ll put you in touch with our local Hot Springs expert.
I’m looking to build a home as opposed to buying one. Now I will have to buy the land that it’ll be built upon so I will need to get some financial help. As you said here, there are different kinds of land as I assumed they were all the same. Anyways, I’ll need to get that figured out first before I can apply for the loan.
I’m looking to invest in some land. I’ll do as you said and do my homework. That way, I’ll know what things to look out for.
I want to buy unrestricted land near the Fayetteville area for 5 foundation ADU for a few empty nesters like me 919 523-4010. Can you help me?
Hi, Andrea – Unfortunately, Fayetteville is not within our coverage region. But we can connect you with an agent in that area.
We are looking for a land lender company that can help us with the land loan for our dad; I’m glad I came across this article and learned some tips when looking for a land lender.
I like how you talked about the importance of knowing the convenience of choosing a local lender instead of the big ones so you can have your loan approved asap.
I will share this with my husband and see how this can help us choose and decide who and when to contact for a land loan.
It was helpful when you said to see how the land has been zoned. My brother told me on the phone last night about how he wants to start a farm in the summer, so he needs to look into getting a loan for land within the next couple of months. I’ll pass these tips along to him so he can know more tips on getting a farm loan.