5 Things to Know if You Want a Land Loan

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.