A vacant land loan is a type of loan used to finance the purchase of vacant land. Developers and investors often use this loan to purchase raw land for future development or resale.
Vacant land loans are typically short-term loans, lasting 1-5 years, and are interest-only loans, meaning that the borrower only pays the interest on the loan during the term. After the loan term is up, the borrower must either pay off the remaining balance or roll over the loan into a new loan.
What Is A Land Loan or Vacant Land Loan?
To begin with, the land and the vacant land loans are the same. Make sure to distinguish both terms thinking they have different meanings since they both mean the same.
Now moving ahead. When you plan to buy vacant land to build something from scratch, you’ll probably need a land loan, only if you aren’t a multimillionaire.
Therefore, the loan required for purchasing land is typically known as a land loan or vacant land loan.
How Do Land Loans Work?
The lender will pay the seller directly if you’re approved for a land loan. You won’t get the loan until the transaction is closed, just like with a regular mortgage.
As soon as the deal closes, you’ll start making payments on your vacant land loan. The terms are usually shorter than a typical mortgage, lasting only 1 to 5 years. You’ll only pay interest during this time, not principal.
That means your monthly payments will be lower than they would be with a regular mortgage. But once the loan term is up, you’ll need to sell the property or refinance to repay the loan.
What Should Be The Credit Score To Attain Land Loan?
To acquire most land loans, you should have a credit score of 700 or above. Since most land loan borrowers don’t have collateral for the land mortgage, the lenders make the decision based on a person’s credit score. Besides, the intent of land purchase also acts as a significant element.
How do you qualify for a vacant land loan, and what are the interest rates?
Qualifying for a vacant land loan is similar to any other type. The lender will consider your credit score, employment history, and income level to determine whether you qualify.
Interest rates on vacant land loans are typically higher than interest rates on regular mortgages since the risk is greater for the lender. The interest rate will also depend on the current market conditions.
Documents Requirements for Vacant Land Loan
When you apply for a vacant land loan, the lender will ask for some standard financial documents, such as
- Your most recent tax return
- W-2 forms from the last two years
- Your pay stubs from the last three months
- Bank statements from the last three months
- A list of your debts and assets
The lender will also ask for a copy of the purchase contract for your property. This contract should include all the terms of the sale, such as the purchase price, down payment, and closing date.
Besides, the lender also needs an appraisal of your buying property. The appraiser will determine the property’s value and ensure it is worth your requested loan.
Difference Between Land Loan & Construction Loan
You may wonder, “what is the difference between a vacant land loan and a construction loan?” A construction loan is typically used when building a new home, and a land loan is used when buying vacant land.
Construction loans are usually short-term, lasting 1 to 5 years, and are interest-only loans. This means you only pay interest on the mortgage during the construction period and don’t have to make any principal payments.
After the construction, you’ll need to refinance the loan into a regular mortgage or sell the property to repay the loan.
Land loans are usually short-term loans, but they can be longer, lasting up to 30 years. The interest rates on land loans are typically higher than the interest rates on regular mortgages since the risk is more significant for the lender.
You’ll need to have a down payment of at least 20% for a land loan, and you’ll also need to show that you have the financial ability to repay the loan.
If you’re planning to build a home on the land, you’ll need to get a construction loan in addition to the land loan. The construction loan will be used to finance the home’s building, and the land loan will be used to purchase the land.
You can usually roll the two loans into one, so you only have to make one monthly payment.
What Are The Risks Of Vacant Land Loans?
Before taking out a vacant land loan, there are a few risks to consider:
The most significant risk is that you may need help to sell or develop the land as planned, and you’ll be stuck with the loan.
If you’re buying the land for investment purposes, there’s always the risk that the value of the land may go up less than you hoped.
You also need to be aware of any environmental risks associated with the land, such as toxic chemicals or flooding. You’ll need flood insurance if the land is in a flood zone.
Before taking out a vacant land loan, do your homework and research the property thoroughly to avoid any unpleasant surprises down the road.
What Are The Risks Of Not Repaying A Land Loan?
If you don’t repay your land loan, the lender can foreclose on the property and sell it to repay the loan.
You could also be subject to a deficiency judgment if the property sale doesn’t cover the entire loan amount. This means you would be responsible for paying back the difference between the loan amount and the property’s sale price.
Another risk of not repaying your loan is that it will damage your credit score, making it harder to get a loan in the future.
Loan Financing Options For Your Land Purchase
The vacant land loan can be a good option for people looking to purchase property but may have a partial amount of money needed to do so outright. There are a few different types of land loans available, each with its benefits and drawbacks. Understanding the differences between these options is essential before deciding which one is right for you.
One option for financing your land purchase is a traditional mortgage.
This type of loan will likely have the lowest interest rate and longest repayment term, making it a good choice for those who can afford the monthly payments. However, it may be challenging to qualify for a traditional mortgage if you don’t have a strong credit history or income.
Another option is a land contract
With this loan; you’ll agree with the seller to purchase the property over time. The advantage of a land contract is that you will only have to make a small down payment at a time. However, if you default on the loan, the seller may be able to keep the property.
You could also consider an investment loan
You can get an investment loan if you use the property for business purposes. These loans usually have higher interest rates than other types, but they can be a good option if you don’t qualify for a traditional mortgage.
The Bottom Line
There are a few different types of land loans available, each with its benefits and drawbacks. Understanding the differences between these options is essential before deciding which one is right for you. The Vacant land loan can be a good option for people looking to purchase property but may need more money to do so outright.
