Why Do Banks Treat Lot And Land Loans Differently
From a borrowers perspective, it often is more difficult to get lot and land loans than it is for the same borrower to get a loan for buying a built home. Understanding the banks perspective can help explain some of the reasons why lot loans and land loans are treated differently by banks.
In the first article in this series we discussed how your own personal situation and needs can help you decide whether you should seek a construction loan, lot loan or land loan for buying a homesite and building a new home. In other related articles we explained how Home Construction Loans have their own unique requirements and procedures and also described the terms for Lot and Land Loans in more detail.
Borrowers who are seeking financing will learn that lot and land loans can be both harder to acquire and have less favorable terms when compared to the typical purchase money loan for buying an existing home. In fact, you may find that some banks just dont offer lot and land loans at all, or only provide them with onerous loan terms that you would not even want to consider.
Types Of Land Loans And Interest Rates
Basically you can buy raw land or vacant lots with “residential lending” up to 160 acres’ with a “collateral loan” at Bank Prime Rate plus something, say Prime + 2%. ;
If your land purchase is bundled with a construction mortgage, you can likely get a less expensive amortizing mortgage at normal discounted mortgage rates.
If your home will ultimately be an acreage home, then acreage lending rules will eventually prevail.
If you intend to but a mobile/manufactured home, then manufactured home lending rules will also apply.
If you are intending to have a lake or cottage property, check here;for those lending rules.
Same for your future construction plans, as construction mortgage rules will apply.
When all else fails, and your property is just not getting bank lender’s attention, there is always the world of private lending.
As mentioned, beyond 160 acres, your;requirements are likely commercial development or agricultural in nature, and require loans specific to those purposes and related risks.
In all cases, a borrower needs to understand what it generally takes to get a mortgage. If you are unsure if you can, that should be your first step.;
Additional Costs And Requirements
For construction loans, lenders arent just looking at your buyer profile theyre also assessing the builder. If Im underwriting a , Im underwriting the builder. I need to know that builder is competent, said Kraft.
Approval is also more difficult for construction loans as there isnt a home or business to inspect and appraise. All the building plans, costs, fees and the feasibility of the building schedule will be closely considered. The builders previous work will likely be evaluated as well, so if your builder isnt up to par, then your loan will be denied.
Its important to keep an eye on the building process budget. If the budget grows beyond what the lender approved, the lender will probably require you to pay for it yourself or obtain a second loan to cover the cost. So dont go adding golden toilets and crystal chandeliers .
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Budget For Other Costs
Once you own the land, you could be on the hook for additional expenses. Review those expenses in addition to any loan payments youll make for the land. Potential costs include:
- Municipal or county taxes
- Insurance on vacant land or abandoned buildings
- Homeowners association dues, if applicable
- Any upkeep required, such as repairing fence lines or managing drainage
- Building costs, if you ever decide to build, add services, or improve access to the property
- Permit fees, for any activity you have planned for the property
How To Apply For An Agriculture Loan
If you are looking to apply for an agriculture loan, it is advisable to research your options online and apply for a loan of your choice by visiting the nearest branch of a lender. When visiting the branch, ensure that you carry the required documentation along with you to quicken the application process.
Certain lenders may also give prospective borrowers the option to apply for an agriculture loan online through their official websites. In this case, you will need to navigate to the respective website, click on Apply Now, enter the required details in the application form, and upload the necessary documents onto the website.
Regardless of the channel that you choose, the lender will verify your application and approve it. Once your application gets approved, the loan amount will be disbursed into your account.
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Get A Construction Loan If You Wish To Build On Your Land
You can apply for a Construction Loan if you wish to build on the land. This way you can get a loan for both your needs. Construction Loans are easier to get because the plot and the constructed house/ building together add more value.;
Once your Plot Loan application gets approved, familiarize yourself with all the terms like early foreclosure charges on your Plot Loan. Also, there are no tax benefits available on Land Loans unless you build your house on it.
Once you take care of the above-mentioned points, you are in for a perfect investment on a land.
What Loan Term Should I Take
This is a pretty simple calculation, but what works for you can be anything but simple. If you decide to go for a lender that offers short term loans you will have higher monthly payments but will pay less interest over the life of the loan. If you spread it out over a longer loan term, your monthly payments will be lower, but the overall interest you pay will be higher.
Paying more interest isnt a bad idea if it means that you can lock down a monthly payment that you know you can make.
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Other Land Loan Benefits And Features Include:
- Term options up to 15 years
- Free 60-day rate lock, once a specific property is identified
- Up to 90 percent financing1
- No building requirements from the lender
- Option to set up automatic payments
1Additional qualifications including debt-to-income limits are required to obtain 90% financing on land loans.
- How much home can I afford? +-
- How much should I put down for a new home? +-
- How much will my mortgage payments be? +-
- Which mortgage loan is a better fit for me? +-
- Which is better for me: A 15-year or 30-year mortgage loan term? +-
Bare Land Acreage And Lot Loans
Get a loan to buy bare land in the country or a lot located in a small town. Even if you plan to build a future home on the property, in most cases, water, well and septic arent required at time of financing.
Both fixed-rate and fixed-to-adjustable interest rates are available with a variety of repayment options. You can learn more about available loan terms;here.
Finance raw land, lots and acreage
- No acreage restrictions
- Power, well and septic arent typically required
- Flexible timelines for future home sites
- Refinancing programs are also available
- No time limits for building
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Construction Loans For Residential Homes
After your land has been approved by the lender as being suitable for building, youll then need a construction loan. Construction loans pay for the land itself and the cost of the construction. They come in two types:
- Construction-to-permanent loans: Also known as all-in-one loans, this type of loan wraps the costs of construction and mortgage into one loan. Youll make interest-only payments during the construction phase, and when the home is built, it will roll over into a regular principal-plus-interest mortgage payment like a traditional home loan.
- Stand-alone construction loans: This involves two separate loans: a short-term one used for constructing the home and a second loan used for the homes mortgage. Youll have to pay closing costs and go through the approval process twice.
Most construction loans require at least a 20% down payment. Construction loan terms vary by lender and interest rates may be slightly higher than regular mortgages. Kraft says some construction loans may require a 1% upfront fee of the construction loan cost. During construction, the lender pays the builder in draw periods. For example, the lender may pay out a certain percent of the loan after the foundation is poured and again when the house is framed. In all likelihood, you, the builder and your lender will decide on when these draw periods occur. It helps all parties to keep the construction schedule on track.
The Right Land Loan For You
Whatever you want the land for, make sure you investigate all your options before committing to a loan. It would be best to plan for the land usage before you look for a loan. This will allow you to apply for the right loan and show lenders that you are less of a risk.
You also need to understand what loan terms are best for you. For example, are you going to pay off the loan quickly, or is a longer period required?
Buying land to build the home of your dreams is a big project, but if you have the right financing in place, it should make things a little easier. Due diligence is just as critical as buying a home and sometimes even more so when its land.
Hopefully, you now have a better understanding of what you should know about buying land and getting a loan. There are many financing options, so its worth your time researching which is best for you.
About the author: The above Real Estate information on getting a land loan was provided by Bill Gassett, a Nationally recognized leader in his field. Bill can be reached via email at or by phone at 508-625-0191. Bill has helped people move in and out of many Metrowest towns for the last 34+ years.
Are you thinking of selling your home? I have a passion for Real Estate and love to share my marketing expertise!
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Quick Tips To Get A Loan To Buy Land
Plot purchase loans are not easily financed by the lender, because of the high risk associated with them. So, to avoid loan rejection and increase your chances of loan approval, follow a few basic tips:
- Maintain a good credit score : Ensure that you have a good credit score of 650 and above to avail a plot loan. A good cibil score ensures the plot loan lender of your creditworthiness and ability to pay back the EMI. Availing loans at a bad cibil score may turn up the interest rates.
- Debt and Income Ratio : Your loan application will be approved if you maintain a good debt and income ratio. Lesser the ratio, the better are the chances of loan approval.
- Apply for a loan based on your repayment capacity : Before applying a loan for plot purchase, you need to evaluate how much loan amount you can afford based on your income and ability can afford. To check the loan affordability, you can make use of online calculators to know the eligibility.
But Lot And Land Loans Can Be Good For Business
Despite these concerns, many banks realize that in the right market conditions it is good business for them to provide lot and land loans to customers. From a banks perspective, a lot loan can be a way for it to build business. Even lenders that dont have active lot loan programs may make exceptions to retain or acquire valued banking customers. The bank hopes that new customers will start with a lot loan and then they will come back to them for a construction loan, long-term financing and other banking products. Learn more about finding lenders for lot and land loans in this related article.
Each borrowers situation is different and each bank is different. And even though some banks dont love lot and land loans, if you are prepared and reach out to a variety of lenders or mortgage brokers to learn about your options you can find the opportunities that are right for you.
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How Easy Is It To Get A Personal Loan To Buy Land
This will depend on what you plan on doing with your land once youve purchased it.
- Its usually easier to borrow money for land that you plan to build a home or business on than it is to buy raw or undeveloped land that wont be improved on.
- How much land you want to buy will also affect whether you can easily get a loan.
- The type of development you want to do on the land will affect if you can get a loan, as well as any city or municipal regulations and zoning laws.
You can improve your chances of approval for a personal loan by going into the process with a solid plan and a specific piece of land in mind. If you plan to build a residence on the property, you will likely further increase your chances of lender approval, however they may require that you provide the land and home as collateral. Buying land for unknown future uses can result in a denial on your loan request.
What Are The Highlights Of The Sbi Plot Loans
The plot loan of the bank is equipped with many features that make it an attractive option for potential borrowers.
Some of such features are highlighted below.
Amount of Loan
The maximum amount of loan that can be sanctioned for eligible borrowers is Rs. 15,00,00,000
Rate of Interest
The rate of interest for SBI Realty Loans is,
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Seller Land Loan Financing
It can sometimes be possible to get finance for the land from the business or person you are buying it from. If you are lucky enough to have this as an option, you can expect to need a big down payment, and the interest is unlikely to be competitive.
Keep in mind if a seller is willing to finance the land purchase, they are probably interested in making it worth their while. That means making money at a higher interest rate than what you would expect to pay from a traditional land lender. A loan on land from the owner is probably going to be one of your more expensive options.
What Should I Expect When Applying For A Land Loan
Apply at;one of our branches;or;over the .
Once you apply, we will help to walk you through the rest of the process so if you ever have a question, we’re here for you.
Once a decision has been made on your application, we will contact you. If you are approved, we will also;discuss your;loan amount, terms and payment information.
Your funds are ready whenever you are.
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How Do Interest Rates Work
The interest rate is how much the lender charges in interest to a borrower for a loan. It is normally expressed as a percentage of the amount borrowed. If youre consolidating debt and the interest rate is still lower than your earlier loan, then youre in good shape. If not, you need to examine if the interest rate makes the loan worthwhile for you.
The interest rate is going to be one of the most important things to look at when considering a personal loan. It adds a significant amount to the overall repayment terms, and even just one percentage point here or there can make a big difference. ;You also need to consider the APR which includes fees and charges. ;APR is discussed below.;
Who Is Eligible For Sbi Plot Loan
There are a; few basic parameters that determine the eligibility for SBI Realty Home Loans. The bank has set the eligibility criteria to ensure that maximum applicants get the benefit of the plot loan of the bank. The details of the eligibility of the SBI Realty Home Loans are provided below.
SBI provides Realty Home Loans only to the residents of the country. This implies that any person who is not a resident of the country cannot apply for the plot loan of the bank.
Age of the applicant
Another important eligibility criterion is the age requirement set by the bank. The age restrictions set by the bank for SBI Realty Home Loans are tabled below,
Apart from the above parameters, the bank will also review other factors that determine the eligibility of the applicant for the plot loans of the bank. The other eligibility factors include,
- The income of the applicant
- Relationship with the bank
- The credit score of the applicant
- Loan amount required
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