Yes, you can secure a mortgage for land, but the process and terms differ from those for traditional home loans. Land mortgages are used for purchasing raw land, lots for building, or undeveloped property. They come with more stringent conditions because lenders consider land purchases riskier than mortgages for homes, primarily because land doesn’t generate income and can be harder to sell if you default.
Types of Land Loans
Several types of loans exist to finance land purchases, including:
- Raw Land Loans: These loans are for land that lacks improvements like roads, utilities, or structures. Since raw land is riskier, lenders often require a higher down payment (20-50%) and shorter repayment terms.
- Lot Land Loans: These are for parcels that are ready for development, usually with some infrastructure in place, such as roads or utility access. These loans come with more favorable terms than raw land loans, requiring smaller down payments and lower interest rates.
- Construction Loans: If you plan to build on the land, construction loans might be an option. These loans finance the purchase of land and the construction process, often converting into a permanent mortgage once the home is built.
- Government Programs: The USDA offers loans for rural land purchases, especially if the borrower intends to build a primary residence. The USDA loans are great for home buyers looking to buy land and build a home in the country. Similarly, the Department of Veterans Affairs (VA) provides certain loans for veterans to buy land and build homes, especially in conjunction with their construction loans.
Land Loan Requirements and Down Payments
Land mortgages typically come with higher down payment requirements—between 20% to 50%—because land loans are riskier. Lenders will often assess the borrower’s credit score, income, and the land’s potential for development. Additionally, a detailed plan, such as blueprints or a timeline for building, may be required to increase the likelihood of loan approval.
Challenges of Land Mortgages
Interest rates on land loans are usually higher than on traditional home mortgages. The shorter loan terms—often around 5 to 10 years—can result in higher monthly payments. It can also be challenging to find lenders that offer favorable rates for raw land, making government-backed loans an attractive option for some borrowers.
Can you buy land with an FHA loan?
It is possible to get an FHA loan to buy land, but it must meet specific criteria, such as including plans to build a home on the property or purchasing land with an existing house. Here are the key FHA construction loan options available (referenced by RefiGuide.org):
- FHA Construction-to-Permanent Loan: This loan covers the cost of buying land, building a home, and lender fees in a single package. Initially functioning as a construction loan, it transitions into a permanent FHA mortgage once construction is complete, eliminating the need for multiple loans.
- FHA One-Time Close Construction Loan: This loan allows borrowers to purchase land and finance the construction of a home in one transaction. The land must be bought at the loan closing or owned for no more than six months before the FHA case number is assigned.
- Land with an Existing Home: If the land already has a home, an FHA loan can be used to purchase it, provided the borrower uses the property as a primary residence. This option aligns with FHA guidelines, which prioritize homeownership and occupancy.
These FHA loan options make it easier to buy land while ensuring that the property will serve as a primary residence, adhering to FHA’s goal of promoting affordable homeownership.
Can you use land as collateral for a construction loan?
Yes, you can use land as collateral for a construction loan, but it depends on the lender’s criteria and the property’s value. In many cases, the land must be owned outright or have significant equity for it to serve as effective collateral. Lenders will typically conduct an appraisal to determine the land’s market value and ensure that it aligns with the loan amount requested. The more equity you have in the land, the stronger your position to negotiate favorable loan terms.
Using land as collateral provides the lender with a secured asset, reducing their financial risk if you default. This makes it an attractive option for borrowers planning to finance new construction. However, borrowers must also provide detailed construction plans and budgets to demonstrate project feasibility. Some lenders may even require the construction project to be completed within a specific timeframe to ensure the loan is used as intended.
Government programs, such as those offered through the USDA or VA, may offer construction loans with land as collateral, particularly in rural areas or for eligible veterans.
Alternatives to Land Mortgages
For those looking to avoid traditional land loans, alternatives include:
- Seller Financing: Some sellers offer financing directly to buyers.
- Home Equity Loans: If you already own property, tapping into your property value with a home equity loan could finance your land purchase.
- Personal Loans: Though rare, some buyers may opt for unsecured personal loans, but these usually come with higher interest rates and shorter terms.
Securing a mortgage for land requires careful planning due to higher down payment requirements, shorter terms, and higher interest rates compared to home mortgages. Exploring government-backed options, like FHA, USDA or VA loans, can provide a viable pathway, especially for buyers interested in rural or undeveloped areas. Smart Lending can help you shop for banks and mortgage sources that offer land loans when you are ready.
References
- U.S. Department of Agriculture. (n.d.). Single Family Housing Direct Home Loans.
- RefiGuide.org: Guide to Land Loan Financing
- Consumer Financial Protection Bureau. (n.d.). What you need to know about different kind of loans.
