Land loans are not mortgages but rather loans provided by a lender for the sole purpose of purchasing raw land to either develop on or keep as a part of your real estate portfolio. Loans for land often have higher interest rates, large down payment requirements, and shorter repayment terms. For those interested in buying a vacant lot, there are a few loan programs available to help you achieve this goal.
Private Lender Land Loan
Select lenders like banks and some mortgage companies may offer private loans to qualifying individuals for the purchase of raw property. Depending on who finances your loan, the interest costs can be fairly high, especially if you plan to leave the property undeveloped. Private lenders set these high interest rates to offset their risk on property with minimal collateral. In addition, down payments can be as high as 50%–also depending on the institution and your history as loan borrower.
USDA Rural Housing Site Loans
Undeveloped lots are common in rural areas and as a result, the U.S. Department of Agriculture extends their home loan programs to vacant lots that will be built on by the borrower. The USDA Rural Housing Site Loans include the Section 523 Loans and the 524 Loans. Section 523 Loans provide a loan for borrowers to purchase the land and build the home themselves while Section 524 Loans are for those who will be hiring a contractor to build the home. Both loans have the following conditions and requirements:
- Repayment term of 2 years (most borrowers refinance to a traditional mortgage once the home is finished being built).
- Typically, low interest rates; from as little to 3% to the current market rate.
- Qualifying individuals are not required to make a down payment.
Home Equity Loan
Current homeowners with a significant amount of equity into their current home can use the equity to help them finance a new mortgage loan in order to purchase a lot of land. The land does not have to be developed on which does not affect the interest rate or other terms of the loan, since a home equity loan has the established home as collateral. To learn more about Home Equity Loans, click here.
SBA 504 Loan
This loan program is specific to business owners looking to purchase and develop on a vacant lot for their own commercial use. This loan is backed through the U.S. Small Business Administration (SBA) but does not work like a typical home or commercial property loan. Instead the SBA provides a portion of the cost through a loan to help the business owner purchase the land. The loan may be for 40-50% of the property cost and requires business owners to put 10% down. Typically, these loans have a 10- or 20-year repayment term and a current market interest rate; additional terms and/or fees may vary from lender to lender.