Loan for Land Purchase—Which Financing Option Would Work Best for You?

by HMLS

A vacant plot of land has that unique appeal of potential. It needs minimum upkeep and enables you to build your dream property from the ground up. If the land happens to be in a pivotal developmental area, you can also benefit from the bullish property prices in the location. The only problem for new buyers is that acquiring a loan for land purchase isn’t quite like getting a regular mortgage.

Land loans are not as common as conventional mortgage products because traditional lenders find them too risky. That is no reason to lose hope, though—in this guide, we have answered some crucial questions, including:

  • How do property land loans work?
  • What are the available loan options for land purchase?
  • How do you get a loan for land and construction?

Real Estate Land Loans—What Every Borrower Should Know

Since most banks and credit unions don’t offer land financing, as a borrower, you have to figure out the basics of how to be attractive to an available lender of your choice. Land loans, by nature, may be similar to home loans, but there are some underlying differences that shape the package—let’s understand how. 

From a lender’s perspective, a regular home mortgage loan is considered low-risk—it’s taken for a fully developed or rehab-worthy housing property, which also acts as the collateral. In the event the borrower defaults on the loan, the property can be foreclosed to indemnify the lender.

Source: Jonathan Arbely

In the case of land loans, the risk variables are wider. The land itself is considered unreliable as collateral because of fluctuating market demand. Lenders are also not too keen on financing land purchases as the borrowers tend to be absentee owners who may not have an emotional attachment to the property. Some landowners hardly strive to keep up with property management or interest payments, so they’re likely to ditch the land the moment they run into financial hardship. Since the yield is too unpredictable, most lenders offering land financing ask for:

  • High interest rates (loan rates for the land purchase are 3–15 interest points higher than standard 30-year mortgages rates but usually at par with commercial lending rates)
  • Quick repayment (within 3–10 years)
  • Large down payments (upwards of 15%)

How To Qualify for a Land Purchase Loan

The eligibility requirements for land loans are not as defined as those for home, rehab, or construction loans. In most cases, the lender will evaluate your application on three parameters:

  1. Property type
  2. End use of the land
  3. Credit standing

What Property Type Is the Easiest To Finance?

The type of land you’re buying—raw, unimproved, or improved—may have an impact on the lending decision. Here’s what to expect with the three options:

  1. Raw land loan—Raw land means an undeveloped property (usually available at dirt-cheap rates) that has never been built on and contains no utilities or infrastructure. Raw land financing is considered the riskiest because the borrower has to work the property up from scratch, so you may have to submit extensive development plans to qualify
  2. Unimproved property loan—The meaning of “unimproved land” is open to interpretation. The land usually contains some basic utilities but still needs a significant investment toward infrastructure. Builders and developers with immediate construction plans easily qualify for unimproved property loans (also called lot purchase loans). Homeowners may qualify as well, provided they submit:
    1. Zoning certificate of the property (whether it’s for residential, recreational, or business use)
    2. Property optimization plans
    3. Agreement with a qualified builder
    4. Proof that the property is free from legal restrictions or easements
  3. Improved property loan—Improved property (ready-to-build land) loans are the most convenient land loans, especially among homeowners and rental property investors. These loans are often rolled in with a construction loan and can later be refinanced or turned into a permanent mortgage

Check out the base loan-to-value (LTV) and down payment rates (based on current lending practices):

Land TypeMaximum LTV RateMinimum Down Payment
Raw land60%40%
Unimproved land75%25%
Improved land85%15%

How Different Lenders Evaluate the End Use of the Land

Lenders, especially traditional ones like banks, only sanction loans depending on the end use of the property. The following table gives you an insight into what different lenders look for:

LenderPurposeDetails
Banks and credit unionsResidential andcommercialNot all national banks offer land loans, but you can find many regional banks and credit unions that lend for both residential and commercial uses. If you want to buy land for investment or speculation purposes, though, the lender may suggest you get a personal loan with high interest rates instead
USDA lendersRural housingUnited States Department of Agriculture (USDA) programs allow land loans to low- or moderate-income groups exclusively for housing purposes. These loans have strict bureaucratic guidelines for qualification, but once approved, you enjoy below-market interest rates
SBA lendersBusiness growthSmall Business Administration (SBA) 504 loans are available to businesses for the purchase of fixed assets, including commercial land. You can apply for these loans through a local Certified Development Company (CDC). You’ll qualify if your business:
Falls under SBA’s size and income guidelines
Has expert management
Is feasible
Hard money lendersResidential, commercial, and investmentHard money lenders are the fastest and most versatile providers of land and construction loans because of their bureaucracy-light setup. These are short-term (1–3 years) loans with 8%–20% interest rates, depending on the state you’re in

Remember that unless you’re getting an investment loan, any lender would prefer to deal with borrowers who provide a realistic timeline for property development.

Source: Joe Holland

What Is the Minimum Credit Score Requirement for Land Loans?

The minimum credit score ceiling for land loans varies depending on the lender you’re working with. In general, your financial credentials are religiously examined for conventional bank loans. You’re more likely to qualify for one if you have a credit score above 680 and a low debt-to-income (DTI) ratio (usually 35% or less).

Loans backed by government agencies like USDA and SBA are designed for borrowers with less-than-excellent credit scores. Lenders prefer servicing borrowers who have credit scores at least in the mid-600s. That being said, the paperwork requirements for government-insured loans are way more voluminous than for conventional loans.

Hard money loans have relaxed financial or background check procedures because they are offered by private investors and lending companies. These products are fully insured by the collateral (which can be the underlying land or another property), so the borrower’s credit score and debt status have little to no impact on the lending decision.

Loans To Purchase Land—Why Hard Money Lenders Are Perfect for the Job

Being an uncommon and risky mortgage product, land loans are not easily obtained via traditional channels. Even if a bank considers your application, you generally have to wait for 30–90 days to hear back from them. Say an applicant gets rejected during the screening process—that’s months wasted with no funding solution in sight.

Hard money loans work like a charm if you’re looking for a quick and efficient solution to finance a land purchase. Hard money lenders tolerate higher risk exposure than traditional lenders, and one of their prime selling points is offering convenience to borrowers. They can finance your deal within 2–3 weeks with minimum documentation requirements, allowing you to buy lucrative land properties ahead of other buyers.

Source: bruce mars

Whether you want to go for construction activities or hold on to the property for investment, hard money loans are a good solution. These loans usually have interest-only payments. The principal sum repayment is due only at the end of the tenure, which is quite manageable if you resell or get a long-term mortgage on a completed housing structure.

Keep in mind that not all hard money lenders offer a uniform set of services or products. Do a basic diligence check on the lenders at your disposal and lean towards those who are experienced and reputable.

Getting a Loan for Property Land or Construction? Choose Hard Money Loan Solutions

If you’ve set your eyes on a promising plot of land, don’t let it slip out of your hands due to funding delays. Get a free financing consultancy with Hard Money Loan Solutions (HMLS), a seasoned lending group based in Delray Beach, Florida, and find out which hard money loan package would work for your situation. HMLS offers all kinds of real estate packages, such as:

HMLS loan packages are designed to meet the specific needs of the client. Depending on the strength of your collateral, you can also qualify for a combo loan for land purchase and subsequent construction. Every element of the loan structure, including the LTV ratio and repayment plan, are tailored to the borrower’s situation.

HMLS lenders are veteran investors and entrepreneurs on a mission to make real estate dealing accessible to everyone. They charge competitive interest rates and do business with borrowers from any background. Check out the typical parameters of an HMLS land loan:

ComponentHMLS Lending Plan
Tenure1–3 years
Borrowing intent Commercial
Residential
Investment
Loan amount$100,000–$50,000,000
LTVUp to 70% (of the purchase price or collateral value—whichever is the lower)
Interest rate9.99%–12%
Rate typeFixed
Origination fee2 points or 2%
Closing time3 days to 2 weeks
AmortizationInterest only

Apply for an HMLS loan today to get customized quotes!

Source: Kampus Production

Benefits of an HMLS Land Acquisition Loan

Buying land is often considered intimidating for property market newcomers, but the HMLS team looks out for you at every step of the journey. The group commands a 5-star Google rating because of its customer-focused approach, reliable funding commitment, and ability to provide financing in challenging scenarios. They offer carefully thought-out advice on property dealings, construction, bridging, house flipping, or resale, as the case may be. 

Reach out to HMLS lenders to get hands-on tips on how to forward your land deal. The group follows a transparent and ethical lending format—they contact you quickly to inform you of your chances of qualifying. In case a land loan doesn’t work for you, HMLS experts may offer bonafide suggestions on alternative financing options, subject to availability.

How To Get a Property Loan at HMLS—Qualification Requirements

HMLS follows no-fuss qualification criteria—if your land deal is practical, you have the funds to meet the LTV ratio, and your collateral has enough equity, you’re a hot candidate to get the loan! That being said, you don’t have to deposit any down payment. Most lenders make the payment to the relevant sellers or contractors, but HMLS releases the funds directly to the client.

Here’s how you get a loan at Hard Money Loan Solutions:

  1. Complete the online loan application form—you only have to provide basic details about your:
    1. Business
    2. Property/collateral
    3. Contact options
  2. Talk to a lender when they contact you—answer their questions to help them assess your funding situation
  3. Review the loan package offered by HMLS
  4. Accept or reject the offer

HMLS may conduct a property appraisal (if not done recently), but overall, the process is quick and stress-free.

What To Do if You Cannot Get a Property Purchase Loan?

Borrowers who cannot get a land loan often take out a costly personal loan to fund the deal, which isn’t exactly wise. Here are three better alternatives to consider:

  1. Home equity loan—If you have an existing home with more than 15% equity, you may be eligible for a home equity loan. You can withdraw funds equivalent to the current value of your holding, and the financing cost is cheaper than getting a personal loan
  2. Cash-out refinance loan—Cash-out refinancing recycles your old mortgage for a larger sum, so you acquire additional funds for investment or renovation activities
  3. Seller or builder loan—Many land sellers or builders offer to finance the buyer. You pay off the purchase price in amortized installments so that lenders never get involved

Get a free consultation from HMLS if you have any other doubts about financing land.

Other Useful Resources

If you’re interested in other types of loans or need honest reviews on specific lenders, check out the following articles from our knowledge base:

Featured image source: Boukaih

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