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A land loan is a financing that allows you to buy land. As with a home loan, you can get a home loan through a bank or lender, which will evaluate your credit history and the value of the land to determine if you are an eligible buyer.
But unlike a real estate mortgage – with an amount in euros allocated to the property – it can be more complicated to determine the value of land because there is no real estate guarantee. This makes land loans a riskier transaction for a lender. As a result, down payments and interest rates will be higher than for a typical home loan.
How do you get a home loan?
There are different types of home loans and each option has to meet its own criteria before it can get financing. In general, you will need to prove that you have excellent credit, an acceptable debt ratio and a constant income. The process is very similar to that of a traditional mortgage loan.
Compared to constructed properties, land is generally a riskier investment, which will require you to pay more for your down payment and interest rates. Land loans are often short-term loans: although you may be familiar with the typical 15 and 30-year mortgage terms, mortgage loan terms often last two to five years and are then repaid in a balloon.. Longer term loans are available for special cases, especially if you plan to use the land to build a house.
Different types of land loans
The process of obtaining a mortgage loan varies depending on the place of purchase and the type of use you plan to make. Here are the common options for home loans:
Loan of raw land
Virgin lands are properties without any improvement, including electricity, sewers or roads. If you buy totally undeveloped land, then you will have to apply for a rough land loan. Obtaining financing for unimproved land can be particularly difficult: the longer the time required to develop these lands represents a greater risk for the lender. You can increase your chances of getting a gross home loan if you have a solid plan to develop the land, as well as a substantial down payment and excellent credit. Nevertheless, higher interest rates and large down payments, sometimes up to 50%, are typical of these loans.
Loan of land
Unlike raw land, land has already established some infrastructure, such as electricity and water lines. Land is usually a building space for residential construction in developed areas. Lenders are more comfortable offering loans for lot ownership than for raw land, so initial costs are generally lower. You will still need a down payment of 10% to 20% and delays can be up to 20 years.
Ready to build
Construction loans allow you to buy land and cover construction costs in one loan. To apply for a construction loan, you must qualify with a credit rating of about 700 or higher, a low debt-to-income ratio, a constant income and an estimated value for housing plans. You can also expect to put 10% to 20% on the loan. But you will have to take another step: present your construction plans. Your lender will want to see a qualified builder perform the construction, along with a schedule and the expected costs.
If you want to speed up the process, make sure your plans are complete. You can work with a builder that the lender recommends or knows well. The lender is involved throughout the construction process because the money is spread over time. Each distribution is called a “draw” and several draws are spaced throughout the project. The schedule of draws is drawn up between the bank, the buyer and the builder; the bank may require an inspection before the first draw.
Construction loans are short-term agreements that typically last about one year. You will only make interest payments until the house is finished, then you will convert to a standard mortgage of 15 or 30 years.
Interest rate on land loans
Lenders view mortgages as risky, so interest rates tend to be higher than mortgage interest rates. The higher your credit score and the better your debt ratio, the more likely you are to benefit from lower rates. Here are the current average rates for a 10-year loan:
- Loan of land: 4% to 5%
- Loan of gross / recreational land: 4.25% – 5.25%
- Construction loan rate: 5.25% variable
Rate of land borrowing by type of property and duration of the loan
|Type of land||Fixed 10 years||15 years fixed||20 years fixed||Fixed on 30 years|
|Lot land||4% -5%||4.30% – 5.30%||4.60% – 5.60%||4.65% – 5.65%|
|Raw / Recreational Land||4.25% – 5.25%||4.55% – 5.55%||4.85% – 5.85%||4.90% – 5.90%|
How to choose your land
Some factors will make your land more attractive to lenders. For example, land that appears easier and less expensive to develop will probably help you to obtain more affordable financing than those that seem complicated to build logistically or legally. Here are some things to consider to speed up your approval process:
Limits: Explore the land to make sure you know the boundaries. By presenting a precise area, it will be easier to prove the value of the land. The majority of lenders will need a statement of limits before approving a home loan.
Utilities: If you buy a lot of land, there will probably be utilities in place. These will include paved roads, water, gas pipelines and electricity. If something is critical or the land is raw, you may need to submit plans and a cost analysis to include these amenities.
Zoning and Restrictions: If your land is part of a homeowners association or is linked by alliances, the lender will want to know about it.
Future changes: Are there any construction projects near your property, such as new highways, schools, shopping centers or other improvements? This can affect the value of your land, so include it in your plans.
Buying a lot can be more complicated and complicated than buying a property. Therefore, your preparation will simplify your loan approval process. The more detailed the proposal you submit to a lender, the sooner you can secure your land and start building.