What Is A Usda Construction Loan
A USDA construction loan is a mortgage that is guaranteed by the U.S. Department of Agriculture . The program is designed to make housing accessible and affordable in rural areas. Like a traditional USDA loan, home buyers borrow from a traditional lender, and the USDA backs the loan. The difference between the two is that while a typical USDA loan allows a borrower to buy an existing home, a USDA construction loan allows borrowers to finance a home build.
The USDA has simplified the financing process through its Single-Family Housing Guaranteed Loan Program, which allows for construction-to-permanent loans. Rather than needing separate loans for the construction and the home itself, buyers can utilize a single close loan.
These loans come with plenty of perks, such as the no down payment requirement. However, buyers may struggle to find a lender to service this type of loan.
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Key Considerations With Land Loans
There are quite a few things youll want to investigate before buying a piece of land or building lot. Understanding what to know about buying land is critical. Going in blind on a loan for land is a significant mistake.
Before pursuing loans for land, youll need to research the following:
- You will need to have the land surveyed in order to get land financing.
- The land will need to be considered buildable in most cases.
- Checking land use and zoning restrictions is critical.
- The more improved the land is, the easier it will be to get a loan from buildable to unimproved to raw land.
- Understanding whether the lot is serviced publicly or privately .
- Is the land serviced by municipal water, or do you need a private well installed?
- Ensure there is access to utilities and public roads.
- Make sure to investigate whether any easements encumber the land, especially ones that affect usability.
- Investigate whether there are any conservation issues.
- Research whether there are any property liens, both recorded and unrecorded.
- Ensure that a title search is done and that it is feasible to get title insurance to protect your investment.
Each of these items on the checklist is essential when getting a land loan.
Buying A Mobile Home And Land
If you want to buy a mobile home and the land, you most likely still need to begin the search by identifying each independently. Where do you want to live? What home should you put on that land? Unless youre buying an existing home and the land where its already sited, you should begin your search with these two buckets in mind. As you get farther down the path, there are ways to bring the entities together, legally and financially.
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Financing Land With A Personal Loan May Be Cheaper
Traditional land loans often involve higher fees, such as appraisal, processing, underwriting and title insurance. If youre looking for a relatively inexpensive loan for a smaller plot of land say, $20,000 a personal loan may be more beneficial than a land loan as it wouldnt make much sense to spend thousands in fees for a loan of that amount.
Many personal loans carry no fees at all, which would make them advantageous in this situation, particularly if you have excellent credit and can qualify for the lowest possible APRs offered by personal loan lenders.
Land Loans: Everything You Need To Know
*As of July 6, 2020, Rocket Mortgage® is no longer accepting USDA loan applications.
Sometimes when potential home buyers are looking to purchase a home, they may also consider building one. The thought can seem perfect until future homeowners realize what it might cost to build a house. Though building a house can be expensive, there are many ways to make it more feasible for first-time homeowners. Land loans are one of these resources.
If you choose to build a house, chances are you might have to apply for a land loan. While Rocket Mortgage® does not offer land loans or lot loans, we understand the importance of educating our clients.
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Building A House: A Breakdown Of How Much It Costs
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If youve spent hours browsing homes online and in-person only to find dealbreakers with every single one, you may have considered giving up on buying a house altogether and opting instead to build your own place from the bottom up.
Building your own house can come with a lot of benefits, the main one being that you have the opportunity to get exactly what you want and create a dream home that checks off every item on your want and need list provided you can afford it.
So, can you afford it?
How To Acquire A Loan For Land
Lending institutions are always interested in making loans to small businesses on assets that are tangible, and land is about as tangible as it gets. You can see it, touch it, stand on it, build on it, or grow and raise food on it. While many of the same principles apply when it comes to asking a bank to finance any type of real estate, acquring a loan for vacant land can be a riskier proposition for banks because often the land being financed is not being used for anything and the borrower could be inclined to walk away from the payments. So if buying vacant land is somewhere in the future plans of your small business, be prepared to make a higher down payment and pay a higher interest rate than you normally would. And, as always, be prepared to submit lots of paperwork to a lender about your company’s financial situation.
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Land Loans: Pros And Cons
Investors, especially new ones, tend to wonder what the advantages are of getting a land loan over something like a construction-to-permanent loan, which lets you roll your costs for buying and building into one mortgage payment. But there are a few benefits to going after a land loan. Read them to see if a land loan might be the right choice for you.
Home Equity And 401 Loans
Finally, if you have sufficient equity in your home, you might consider borrowing against it to pay for your land purchase. The advantages here are clear. Home equity loans are fairly easy to obtain . Home equity lines of credit also carry fairly low interest rates, and very favorable repayment terms. Depending on the cost of the land you are planning to purchase, this can be an ideal solution.
Using the assets in your 401 to buy land may be an option, but only if your employer is willing to allow you to borrow money from the company’s retirement plan. There is no law requiring employers to allow employees to borrow from their existing 401, so this option may not be available to everyone. It’s worth noting, however, that even if you are authorized to borrow against your 401 you will only have access to a limited short term loan. Depending on the cost of the land you want to purchase, this may or may not be sufficient. Having said that, borrowing against your retirement savings can be a lower cost alternative to traditional financing.
Land loans are typically more difficult to obtain than other secured loans, but any challenges to your loan application can be overcome if you have a definite plan in place to improve the land and increase its value as an investment opportunity for your lender.
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Everything You Need To Know About Land Loans
Buying a parcel of land, either as a long term investment or on which to build a new home, is not quite as simple as you might think. Unless you’re in a position to pay cash up front, you’ll need to borrow some money to finance the purchase. But borrowing money to purchase raw land is not quite that straight forward.
Land loans are unique financial products, and they are handled differently than mortgages and other secured loans. If you’ve never purchased land before, you may find the process a bit more challenging than you expected. But a short primer should help you understand how land loans work, and what your options are when looking for a lender.
Faq: Personal Loans And Land Loans
WHAT ARE TYPICAL PERSONAL LOAN INTEREST RATES?
Personal loan APRs are about 10% to 25%, but they can be even higher for subprime borrowers with credit scores below 640. Since personal loans dont require collateral, lenders rely more heavily on your credit score to determine your eligibility as a borrower. It also means interest rates are typically higher than what youd find with secured loans. Borrowers with good credit will get the best APRs on personal loans.
WHAT ARE TYPICAL LAND LOAN INTEREST RATES?
The interest rate on a land loan depends on the type of loan youre seeking. Ten-year lot land loans carry interest rates of 4% to 5%, while raw/recreational land loans are a quarter of a percentage point higher at 4.25% to 5.25%. Average construction loan rates range from almost 6% to almost 10%.
WHERE CAN I FIND BAD-CREDIT PERSONAL LOANS FOR LAND?
Its difficult to secure a personal loan with favorable terms if you have bad credit. Most lenders require that you have a credit score of at least 600, and even with a credit score in the 600s, youll end up paying a higher APR than prime credit borrowers. However, certain lenders do specialize in personal loans for borrowers with bad credit. Search out online lenders, banks and credit unions, but beware of payday loans, which come with extremely high APRs.
WHERE CAN I FIND BAD-CREDIT LAND LOANS?
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When Are Lenders Most Likely To Grant You A Loan
Lenders are most willing to lend money when you plan to build on your property because this adds value.
Holding raw land is considered speculative, and even if building a structure is risky, youre more likely to come out successful in the end.
Still, it is possible to get a land loan if you are not planning to build on the property, but you should expect to pay a very high down payment .
For this reason, the most common type of land loan is a construction loan.
How To Get The Best Rates
Theres a few things that you can do to boost your chances of securing the most favourable interest rate available
- Improve your credit: Take steps to improve your personal and business credit. You can read more about this in our guide to optimising your credit file for a mortgage.
- Lower your expenses: Many lenders will stress test your financing against possible future rate rises. Cutting out unnecessary expenses for both yourself or your business can help boost your creditworthiness. This might include paying off any debts youre in a position to clear or seeking advice about consolidating debt.
- Put up or increase your collateral: A lender will see your application as lower risk if your debt can be secured against another tangible asset, such as a property or asset you own and hold sufficient equity in. But be careful with this as defaulting on your mortgage payments could result in the repossession of the security youve put up.
- Increase your deposit size: The larger your deposit, the lower your LTV and the lower your perceived risk.
- Speak to a land mortgage broker: They will know exactly which specialist lenders can offer the most favourable rates on a land mortgage to a customer with your needs and circumstances. They can offer you bespoke advice, help you with your paperwork and potentially save you time and money by introducing you to the right lender, first time.
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Using A Personal Loan To Buy Land
Personal loans are generally unsecured, meaning they dont require collateral. They are a flexible form of financing, as they can be used for a variety of reasons, such as debt consolidation and home improvement financing even a land purchase.
Since these loans for land dont require collateral, lenders rely more heavily on your to determine your eligibility as a borrower. Lenders typically look for the following when analyzing potential personal loan candidates:
- Good credit score
- Steady income
- Low debt-to-income ratio
Community banks, credit unions and larger banks may be more inclined to consider personal loan borrowers who, along with having strong credit and income, are existing customers with well-managed savings accounts or other loans with their institution. Online lenders offer personal loans to those who qualify based on creditworthiness and other factors specific to the borrowers financial profile.
What To Consider Before You Borrow Money To Buy Land
Before borrowing money to buy land, its sensible to keep the following in mind:
1. Know what land youd like to buy
A lender wants to know what youll be doing with the land, and going to a lender without knowing the land itself can result in a rejection.
2. Look for land with planning permission in place
Lenders will view land with planning permission as lower risk and may be more willing to let you borrow as a result.
3. Improve your credit rating
The better your credit score, the more likely you are to be accepted for a land loan and the more likely you are to qualify for more favourable interest rates. If your credit score is low, take steps to improve it such as checking youre on the electoral roll, correcting mistakes on your credit report and paying bills on time.
4. Develop a plan for the property
Prepare a substantial plan for your property, including your estimates of costs and timeline for building on the land. Be specific for your needs, for example, when planning a farm, include costs for purchasing livestock, seed and farm equipment.
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Find A Usda Construction Loan Lender
Once you have your contractor agreement in place, you can start working with lenders to get preapproved for your loan. Keep in mind that you can’t just use any lender it must be a lender that’s a part of the USDA loan program and who offers USDA construction loans. To get preapproved, you’ll need to provide information such as your income and employment verification, a list of your assets and liabilities, your DTI ratio and a credit check.
The Local Bank Advantage
Whether or not youre already signed up with a community bank or , they should be the first lender you try on your quest for a land loan. Unlike a national bank or loan company, community banks know your town and its real estate values. Theyre also more motivated to contribute to growth and development on the local level. Therefore, they are usually more willing to take a risk on lending you money to buy land.
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Is It Hard To Get A Loan To Buy And Build On Land
It can be challenging to get a loan to buy and build on undeveloped land. You need to make sure you meet all the qualifications for a construction loan and will be able to refinance later since it’s a short-term loan. Having a solid plan that is both exact and flexible will help lenders feel confident that you’ll be able to return not only your land loan but also your construction loan and the long-term one that comes after it.
Personal Loans May Offer Shorter Terms Than Land Loans
Personal loans tend to have shorter terms, typically 12 to 60 months, than some other loans. A land loan also generally has a shorter term than a traditional mortgage, although some can offer longer terms than the average personal loan.
Borrowers who are looking for a longer-term, potentially lower-interest loan for a more expensive plot of land are not as likely to get a personal loan to finance this expense.
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Land Loan Interest Rates
The interest rates for vacant land loans are generally higher than the rates on typical home loans. This is due to land loans having a higher risk associated with them to lenders. As land prices tend to fluctuate more frequently than existing homes, and vacant land will generally take longer to sell than an existing home, lenders are more likely to take a more conservative approach when providing a loan to only buy land.
Get a free home loan quote today for an estimate of what you could borrow including the costs and fees involved or speak to your local Mortgage Choice expert today to understand what interest rates would be available to you.
Lenders Take A Bigger Risk On Land Than On Homes
When you go to a bank or other lender to borrow money for a land purchase, they have to evaluate not only your credit history but also how easy it will be for them to recoup their investment if you default on the loan. While its relatively easy to place a value on houses or condos, and to sell them after a foreclosure, the value of and demand for a plot of land can be harder to determine.
Understanding the lenders point of view will help you develop a stronger case for your loan request. It may also influence the plot of land you ultimately choose, and where you go for financing. Well discuss those options in separate sections below.
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