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Land Loans

There are several types of land loans -- raw land, unimproved land and improved land.

Loans for unimproved land are more difficult to obtain. [©Jupiter Images, 2010]
©Jupiter Images, 2010
Loans for unimproved land are more difficult to obtain.

Land Loans

Obtaining land loans is not an easy venture. Lenders tend to approach land loans with great caution; consequently, prospective borrowers should be aware of specific factors that minimize or maximize chances of obtaining such a loan. Prospective borrowers should also have a basic grasp of the different types of available land loans and the respective features of each.

Land Loans Defined

The National Archives and Records Administration explains that land loans fall into one of the following categories:

  • Loan for land on which there is no structure (raw land loan)
  • Loan for land that has all necessary facilities required for future development (improved land loan)
  • Loan for land and everything necessary to develop the land

Most land loans have 10 to 15 year maturities. In some cases, the interest on land loans may be eligible for a tax deduction on income taxes.

Unimproved Land/Raw Land Loans

Vacant land not prepped for construction is often referred to as unimproved land. Unimproved or raw land has no added improvements, such as sewers, utilities, streets or structures. Generally, it is quite difficult to obtain a loan for raw or unimproved land compared to improved land because the lender has to speculate on the future of the land. Consequently, most loans for raw land have higher interest and higher down payment requirements. Bankrate reports that lenders typically require a 20 to 50 percent down payment on an unimproved land loan.

To increase chances of getting a raw land loan, prospective borrowers should clearly delineate plans for the land. This includes obtaining a staked survey of the property and a complete evaluation of the property's easements and public road access. Prospective borrowers are more likely to be approved for a loan on land that has direct access to a public road.

Improved Land Loans

Improved land loans are designed for loans on land prepared for future development. Contrary to unimproved land loans, improved land loans are easier to obtain. Lenders are more confident because they recognize they receive a payout as soon as a structure is built on the land.

Texas Veterans Land Loan

The State of Texas' Texas Veterans Land Board has a unique program specifically designed for eligible veterans. Through this program, veterans can obtain a land loan, which may not exceed $80,000 and has a 7.25 percent interest rate. In addition, the loan requires a minimum 5 percent down payment. Land purchased as part of this program must meet the following requirements:

  • Completely falls within Texas borders
  • Includes at least one acre
  • Accessible via a public road
  • Described with a field note that holds the surveyor's official seal

All land purchased under this plan must be surveyed by a Texas Veterans Land Board appraiser. Loans are for a 30-year loan term.

Hard Money Loans and Second Mortgages

Other financing options include hard money loans, which are basically private loans. If the circumstances permit, a private loan may be arranged with the current owner of the land. If this is not an option, then prospective borrowers might want to consider a hard money land loan through a private lender. Direct Money Lenders generally offers loans for land development to individuals or investors with the following profile characteristics:

  • Are builders, developers or investors
  • Are professionals and have experience
  • Have been turned down for a loan by the bank
  • May not have enough liquidity to satisfy bank lenders
  • May have subpar credit but strong cash reserve

Another group, Fairfield Financial Services, also offers private land loans with loan-to-value ratios as high as 75 percent. This particular company heavily researches each loan, evaluating the developer's plan. Loans offered through Fairfield Financial Services range from $50,000 to $9 million, with 10 to 15 percent interest rates and 1- to 5-year terms. Broker fees are approximately 5 percent. States served include Alaska, California, Colorado, Florida, Georgia, Idaho, Montana, Nevada, New York, Oklahoma, Oregon, Texas, Washington and Wyoming.

People who already own a home may want to finance the purchase of land by taking out a second mortgage or refinancing their home with a cash-out option. These methods for financing are more appealing to banks because they have some collateral. These types of loans also generally have low interest rates.

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