It's no secret that rent prices have gone through the roof in recent years. In many areas, there are simply too many people looking for places to live and too little new housing being built. This sucks for most of us but also represents an opportunity: land loans can set you on the path to owning your own home.
What Are Land Loans?
The most common route to homeownership is to apply for a mortgage, browse houses for sale, and so on. A land loan kind of sidesteps this process:
Instead of buying a house and using the building as collateral, land loans enable you to buy a vacant plot with a view to building on it later. "Later", with land loans, is a flexible concept. You can start breaking ground as soon as the title is in your name, but you're also allowed to wait several months.
What Are the Types of Land Loans?
Basically you'll see three main types of land loans:
Raw Land Loan
If the property is out in the boondocks, with no utilities or road connection and perhaps lying in an unincorporated area, it's called "raw" land. It's pretty difficult to get these kinds of land loans for bad credit.
Unimproved Land Loan
The line between raw and unimproved land can be blurry, but as a general rule "unimproved" land can at least be connected to local roads, electricity, and other amenities without spending a ton of money. As long as you have a clear plan for using the lot and your credit score isn't terrible, loans to buy unimproved land are attainable.
Improved Land Loan
"Improved" land typically lies within an existing or new neighborhood and only needs a structure to be erected. These land loans are the easiest to get and have the lowest interest rates.
How Does a Land Loan Work?
If you have a general idea of how mortgages are structured, you're well on your way to understanding land loans. Like a mortgage, a loan for land purchase uses the property you'll buy as collateral, or in other words a guarantee that you'll pay the money back. Land loan lenders will also expect you to pay some money down - 100 percent financing land loans are very hard to come by.
Assuming your application is approved, you'll receive the money that you'll have to pay back in monthly installments over several years. Note that you'll end up repaying more than you borrowed: land loans for bad credit carry pretty high interest rates.
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How to Borrow a Land Loan
The process of getting a lot loan isn't all that complicated, and all land loan lenders have staff that will walk you through it. The one thing you really need to remember is to do your homework.
Aside from the size of your down payment and your credit score (and to be frank, land loans for bad credit are not approved often), the factor that will influence the loan officer's decision most is how good your plans are for turning a vacant lot into a livable property. Zoning issues, surveying, the construction timeline, and of course how you intend to pay for everything all have to be addressed - this will give you the best odds of being granted a loan for land purchase.
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Advantages and Disadvantages of Land Loans
Is a loan to buy land your best option? This depends on your specific circumstances. The main pros and cons to keep in mind are:
- If you're motivated and can do some of the construction work yourself, a land loan may be the cheapest route to owning your own home.
- You're in control of all facets of construction, allowing you to build the house you've always dreamed of.
- A loan to buy land is more difficult to get than a normal mortgage. Interest rates on land loans for bad credit are high.
- Unimproved land and half-finished houses are difficult to sell. If you run into obstacles, you may have to take a loss.
In short, building rather than buying a house requires you to be more hands-on and accept greater risks. It is for this reason that loans for land are more difficult to get than mortgages.
What Are the Alternatives to Land Loans?
As we've mentioned, loans for buying land only are scarcer than mortgages. So, where do you turn if you don't want to or can't get a land loan?
The most important feature of this type of loan is that there's no restriction on how you can spend the money - your interest rate will be the same whether you use it to buy land or go on an extravagant vacation.
Personal loans are available through banks and credit unions as well as more innovative financial companies. The terms you'll get from each can vary widely. If you want the best possible deal, you should use a loan broker like USBadCreditLoans. This allows you to compare different repayment terms, interest rates and other factors while borrowing as much as $35,000.
Like land loans, construction loans are aimed at people who want to build from scratch. The difference is that, while a loan for land purchase is supposed to be used only for that, a "single-closing" construction loan may cover the lot's price as well as contractors' fees.
Construction loans are slightly easier to apply for than land loans for bad credit. The main tradeoff is time: with a loan to buy land, you're free to wait until you've saved up some money for building, the road network is extended to the property, or the housing market improves. Construction loans normally have a much stricter timetable.
Government Land Loan Programs
The Federal Housing Administration is an excellent option when it comes to land loans for bad credit. Covering both the land financing and construction costs, you need only a minimum credit score of 500 and 10% down to apply for these land loans. Once construction is complete, the loan is converted to a low-interest, long-term mortgage; this is how most construction loans work.
The FHA also offers FHA 203(k) loans which can be used to rehabilitate a run-down property - buying a wreck of a fixer-upper and rebuilding it from bare studs could be a good alternative to getting a loan to buy land. Veterans and current service members will also want to contact the VA for affordable land loans; these are only available for lots that are already connected to roads and utilities.
Home Equity Loans
If you already own a house, you can borrow against it (that is, use it as a guarantee for a new loan) and buy land to build a second home or investment property. Home equity loans are similar to personal loans in that the money is given to you as a lump sum to use however you wish. Because you're offering your current home as collateral, interest rates are relatively low.
Home Equity Lines of Credit resemble home equity loans in that you risk losing your house if you can't repay what you owe. The major difference is that HELOCs are a kind of revolving debt: a little like a credit card, you can borrow money when you need it and pay it off when you're able.