Land Loans: Raw Land vs Lot Land

In this article:

• What Is a Land Loan?
• Loan for Raw Land
• Loan for Lot Land
• Factors to Consider When Purchasing Land

What Is a Land Loan?

Land loans come in all shapes and sizes and are unique compared to existing home loans. The purpose and current use of the land can dictate the terms of the loan.

Loan for Raw Land

Unimproved “raw” land is usually the hardest to finance or get with favorable terms. Lenders consider raw land as the least desirable collateral for all land uses. Most will require more money down (up to 50 percent) and charge a much higher interest rate.

Loan for Lot Land

Lot loans are usually available from local lenders and some national lenders. A lot loan typically consists of one or more building sites for residential construction. These sites usually have been improved with the addition of sewer and water systems, streets and easy access to other utilities. Typically lot loans require 10-20 percent down, with amortization terms up to 20 years. These lots are also financed by home equity or cash out refinances on the borrower's current home.

Factors to Consider When Purchasing Land

There are many factors one should consider when shopping for a land site. They include:

• Access – The lot will need to have access to public roads or a permanent easement granted to access a public road.
• Utilities and improvements – Are there paved roads, streetlights, a public sewer, water, electricity and natural gas? If these amenities are not already included in the purchase of your proposed building lot, these will be a future cost to develop your site. If no public sewer and water are available, the cost of a private septic system and well construction will be at your expense.
• Zoning and land use restrictions – Is the land currently zoned for your intended use for the property? Is the lot big enough for your dream home or is it restricted by the covenants and setback requirements? Is the lot in a homeowners association? If so, how much are the dues and what association restrictions are you subject to?
• Future plans – Check with the local planning department for future sites near the land that may affect the future value of your property. They may be able to show you the future sites for schools and parks as well as projected new highways or garbage dumps.
• Boundaries – Typically you will want to get a stake survey to mark the corners of your lot. Also for irregular acreage or land sites it's important to know exactly what's included on your site. Most lenders will require a boundary survey.