If you want to buy a new home, prepare to shell out big bucks. The average sale price of a new home in the nation was $376,700 in February 2018, according to the U.S. Census Bureau.
If that kind of price tag is out of reach or you want to build a home to fit your own specifications, buying land could be a cheaper option. However, land purchase financing is significantly different from traditional mortgage financing. Before applying for a land loan, make sure you understand how the process and repayment terms work.
How does land purchase financing work?
Some people are opting to build tiny homes to save money, while many are buying undeveloped plots of land to construct their homes. Even those who aren’t downsizing but want a more traditional house are buying land so they can develop it to meet their requirements and tastes.
According to the U.S. Department of Agriculture, the nationwide average price for an acre of land is $3,080. The price could be higher, depending on where you live. For example, an acre of land in New Jersey costs $12,800 on average.
If you don’t have money in the bank to buy the land outright, you could turn to land purchase financing. Like mortgages, land loans allow you to borrow the amount you need to buy the property and then repay the debt over time.
Evan Roberts, the co-founder of Dependable Homebuyers, said there are two kinds of land that can be bought: lot land and raw land.
“The largest factor in considering a land loan is whether or not you’re purchasing a plot which has been zoned for residential construction and includes utility hookups,” said Roberts. “Without this, the plot is considered raw land. Residential plots are less risky since they are building-ready.”
3 ways to finance your land purchase
If you want to buy a prebuilt home, there are many loan programs available. And if you don’t have money saved for a large down payment, there are programs to help you qualify for a mortgage with a down payment as low as 3.5%.
With land purchase financing, however, you don’t have that luxury. A land purchase won’t qualify for a traditional mortgage, so you’ll need to pursue other borrowing options. The type of loan you pursue determines which lenders you can work with, your down payment requirements, and interest rates. Here are three options for land purchase financing.
1. Loans for lot land
Lot land is a plot that a county has zoned for residential use. Typically, the land already has been connected to roads and utilities such as electricity, sewer, and water systems.
According to real estate site Zillow, most lot-land lenders require you to have a down payment of 10% to 20% of the land’s total price to qualify for a loan. The repayment term can go up to 20 years.
Loans for lot land are available from banks and credit unions.
2. Loans for raw land
If you want to live off the grid or near a beautiful forest that could be the perfect backdrop for your home, you’ll need to take out a loan for raw land.
Raw land typically doesn’t have the amenities available on lot land. It doesn’t have access to water or sewer lines, electricity, or even roads. You’ll be responsible solely for the cost of hooking up your land to utilities, which can cost thousands of dollars. Lenders view loans for raw land as riskier than those for lot land. The higher risk means most lenders will require a bigger down payment. According to Roberts, raw land loans usually require a 50% down payment.
Finding lenders for raw land loans can be more challenging than for lot land loans. Some banks offer raw land loans, but you also might have to turn to niche lenders such as Country Living.
3. Personal loans
If you don’t qualify for a land loan or don’t have enough money saved for a down payment, another financing option is to take out a personal loan. Unlike land purchase financing, personal loans don’t require a down payment. Many personal loans are unsecured, meaning you don’t have to put up any collateral. Also, personal loan lenders can work with borrowers with credit scores as low as 580, so they might be more willing than land loan lenders to work with you in such cases.
However, using a personal loan to buy land is expensive. The interest rate on personal loans can be dramatically higher than those on land loans. Plus, they often have much shorter repayment terms.
For example, the Randolph-Brooks Federal Credit Union offers land loans with interest rates as low as 4.95% and repayment terms of up to 15 years. By contrast, some personal loan lenders have interest rates as high as 35.99%. Also, most personal loan lenders have repayment terms of five years or less.
The difference between the loan types can cost you dearly. If you took out a $5,000 land loan at an interest rate of 4.95% and paid it off in five years, you’d repay a total of $5,655. However, if you took out a five-year personal loan of $5,000 at a 35.99% interest rate, your total repayment would be $10,838. Thanks to the much higher interest rate on a personal loan, you’d end up paying back more than double the amount you borrowed.
Financing your home
Finding the perfect plot for your home is exciting, but it’s important to understand the nuances of land purchase financing to ensure you make a sound decision. The costs of developing land can be prohibitive, so carefully review any possible expenses.
If you decide to buy a prebuilt home instead of developing land to save money, compare multiple mortgage offers to get the best rate.
Interested in a personal loan?Here are the top personal loan lenders of 2018!
|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.16% to 35.89%. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at time of application. The origination fee ranges from 1% to 6% and the average origination fee is 5.49% as of Q1 2017. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months or longer.
7 Important Disclosures for Earnest.
8 Important Disclosures for Avant.
* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
|7.73% – 29.99%||$1,000 - $50,000||Visit Upstart|
|6.26% – 14.87%1||$5,000 - $100,000||Visit SoFi|
|6.99% – 35.97%*||$1,000 - $50,000||Visit Upgrade|
|8.00% – 25.00%2||$5,000 - $35,000||Visit Payoff|
|4.99% – 29.99%3||$10,000 - $35,000||Visit FreedomPlus|
|5.99% – 18.99%4||$5,000 - $50,000||Visit Citizens|
|15.49% – 34.49%5||$2,000 - $25,000||Visit LendingPoint|
|6.16% – 35.89%6||$1,000 - $40,000||Visit LendingClub|
|6.99% – 18.24%7||$5,000 - $75,000||Visit Earnest|
|9.95% – 35.99%8||$2,000 - $35,000||Visit Avant|