In the not-too-distant past, settlers traveled west to claim land and build their futures. Nowadays, you don’t have to travel by wagon to find land you can invest in. Many investors consider land a viable asset to hold, especially as more and more development occurs to support future generations. So which banks do you choose for your land loan?
Our guide introduces you to the types of land classification that dictate which loans you’re eligible for and from whom. We’ll also introduce you to the banks you can choose from to sponsor your land loan, whether you want to raise livestock, simply let it appreciate as time goes on, or anything in between. In addition, we’ll talk about what the application process looks like and what alternatives there are to common land loans.
Are you ready to see how you can finance your next land loan purchase? Let’s get started!
What are Land Loans
Similar to a mortgage loan, land loans give individuals and/or small businesses the opportunity to finance the purchase of land for several reasons, including agriculture, recreation, or development. At the same time, land loans are riskier for banks and credit unions, as there’s a higher chance the lendee may abandon both the loan and the property.
In light of this increased risk, lenders typically charge a higher interest rate on land loans when compared to mortgages. Land loans make up a small percentage of the lending market compared to mortgage loans, but that’s not to say you can’t find one if you look in the right place.
When you’re looking at land loans, it pays to do your homework. You should ensure that any financial institution you choose is fully licensed, especially if you’re just getting started in real estate investing. Ensure you make a smart move before you take the plunge by visiting the Nationwide Mortgage Licensing System (NMLS), which is a legitimate database of licensed and credentialed lenders.
Types of Land Classification
The type of land you purchase will impact your financing chances. For instance, it’s typically less of a risk for a lender to finance improved land, especially given it is already developed. If you were to default on the loan, there is potential for buyers to leverage the state of the land in attempting to turn a profit.
Land that has not yet been improved in any way is classified as raw land. Farmland does not qualify as raw land, at least once it’s cleared and tilled for planting. However, you can invest in raw land to then develop it into a farm once you’ve obtained financing.
Though raw land doesn’t have access to utilities and may not even be accessible by road, it is one of the cheapest types of land you can invest in. This is mainly what attracts potential buyers, from the ability to make do with it what you want to the natural feel that’s quickly disappearing as more and more land is being developed.
You might consider unimproved land to be in that limbo state between not-quite-raw-land and land with access to basic utilities. Banks can also consider this type of land to be risky, as there’s no established residence on the property to keep people settled in one place. However, access to utilities can improve the value of raw land, so it’s something to consider.
Finally, improved land is that which is accessible by road and has full access to utilities. Without a residence or any sort of dwelling on the property, this land is perhaps the most expensive compared to a fully developed plot. Improved land is ready for development but can also be easiest to get financing for. With such a useful state, it’s desirable to nearly any buyer, depending on location.
If you are looking to build a house on the land and want to set yourself up for success, you might invest in improved land. This type of land will have the work already completed for you, while still allowing you to build it up how you want.
7 Best Banks for Land Loans
When it comes to land loans, banks are some of the best lenders to borrow from. However, you may also want to look into private lenders as well. It all depends on what terms you’re looking for and what interest rate you can qualify for.
1. Alpine Bank
Based out of Colorado, Alpine Bank offers land loans for lot and new construction. The maximum loan-to-value amount is 75% on improved land. You can also inquire online about further lending details and information on monthly payments. Reach Alpine Bank via email, chat, or by visiting a branch today.
If you want to invest in undeveloped land and residential lots, check out Atlantic Union Bank. This particular institution requires that you call or visit a branch to talk about your financing options. While there are no online calculators, interest rate guidelines, or downpayment information on their website, Atlantic Union Bank does offer separate construction loans as well.
3. Banner Bank
Available to residents of Idaho, Washington, Oregon, and California, Banner Bank allows you to borrow up to 75% of the purchase price. Banner will finance both improved and unimproved lots with competitive interest rates and fees. Plus, the loans are all approved in-house so there’s no need to worry about a third-party service. In addition, you can also get financing for construction and personal loans.
You can apply for a land loan from California Bank & Trust online, over the phone, or in person. Applicants will have the option of taking out a single loan to cover not only the land purchase, but further development as well. This can save you time and money when it comes to seeking out a separate lender.
California Bank & Trust offers both land and construction loans, with financing up to 60% of the lot purchase price available, along with multiple loan options.
5. Clear Mountain Bank
Only available in West Virginia and Maryland, Clear Mountain Bank provides financing for up to 90% of the purchase price. You can find out more about their loan application on their website, or by speaking to them over the phone or at a local branch. Clear Mountain Bank provides loans for residential lots for future development as well as unimproved land for recreational purposes.
Lot loans and land loans are available from Old National Bank. Lot loans are for lots up to 5 acres in size and require a 20% downpayment. You’ll need to pay at least 35% of the purchase price in downpayment for lots between 5-25 acres in size. Loans from Old National Bank are available for both improved and unimproved land with no expectation that you’ll begin building immediately.
Old National Bank recently merged with First Midwest Bank. These financing terms are only available to residents of Indiana, Minnesota, Wisconsin, Michigan, and Kentucky. Each loan will come with various repayment periods and interest rates. You can also use the bank’s online loan calculator and complete your application online as well.
7. WaFd Bank
Land loans are available from WaFd Bank in the following states: Arizona, Idaho, Nevada, New Mexico, Oregon, Texas, Utah, and Washington. You can use their online calculator to see what you qualify for or apply online or at a branch near you.
WaFd Bank offers financing up to $700,000 for land loans, with no obligation to start construction immediately. There are minimum downpayment terms and specific interest rates that go with your loan, but these will depend on your credit eligibility. However, the shorter your repayment period, the lower your rates typically are.
How to Apply for a Land Loan
Applying for a land loan is the first step in turning a $10,000 investment into $100,000 if you want to think of it that way. Many investors who use real estate as their side hustle often apply for a land loan as part of their strategy to make money and increase their wealth. So what are the steps involved in applying for this type of loan?
- Find your ideal plot of land. It may be best to search out a few choices in case you can’t get the lending you want for your first choice.
- For each land parcel you find, draw up a plan for development and construction. Be sure to include a timeframe for completing this construction. If you don’t want to or don’t have time to complete this step yourself, you can also hire someone to draw up what is essentially your business plan.
- Seek out lenders that offer the type of land loan you need to complete the work. For example, if you’re looking to build apartments on improved land, you’ll want to find lenders who offer improved land loans.
- Apply! While it may sound simple, there’s a lot to applying for a land loan. Most lenders will require your business plan for developing the land, proof of excellent credit, consideration for zoning and land use restrictions, how you will access utilities, what the land and boundary surveys say, as well as any related concerns.
Most lenders will offer shorter repayment terms for land loans. In the eyes of a lender, a foreclosed land parcel is much harder to value than one that can easily be classified.
Options for Alternative Financing
It’s nearly impossible to find free land to invest in, but you can always try the following options to fund the purchase of the land you want.
Sections 523 and 524 USDA loans allow individuals who want to purchase land for personal development as well as new construction to qualify without a downpayment. USDA loans have a low interest rate and typically require you to pay back the loan in full within 2 years. These loans from the USDA are restricted by zoning and land-use regulations but can help low-income families afford land.
You can take out an FHA loan for more than just land purchase. In fact, if you’ve had a bankruptcy or foreclosure, FHA loans can help you qualify, even if there is a high interest rate attached. Obtaining an FHA loan is best for buying and building on land within a short period.
Home Equity Loans
If you already own a property, a home equity loan might be the way to go. This type of loan works in your best interest when you have little to no debt. There are many options available for transferring any equity you have as collateral for the new loan. Home equity loans are one of the more common ways to invest your equity into a new profit source.
If you want to free up the equity in your home to invest in land, you can do that with cash-out refinancing. These terms will allow you to pay off your current mortgage to get into another one for the land you want to purchase, potentially with a lower interest rate. You may also be able to take advantage of easier monthly payments, depending on the terms you receive.
The Small Business Administration offers its 504 loan program for business owners who want to finance a land purchase. You are responsible for covering 10% of the purchase price, while the Small Business Administration covers 40%. The remaining half of the loan is covered by a lender you choose. Terms vary depending on which lender you go with.
In certain cases, you can obtain financing directly from the landowner. In most cases, these types of loans are associated with a large downpayment and less-competitive interest rates. At the same time, you may look into seller financing if you can’t qualify for traditional financing through a bank. In some cases, you may end up paying more for a property with seller financing than you would with traditional financing.
The lowest downpayment for financing land loans is set at 35% minimum for raw land, 25% for unimproved land, and 15% minimum for improved land.
Buying land can be a good investment if you plan on holding it for a long time. If you plan on saving for a house and want something that will appreciate and earn you a sizable downpayment, investing in land could be the way to do it.
When you purchase land, you can make money in several ways. For instance, you may keep it to appreciate as property values rise. You may also want it for storage or foresting. Some investors use their land for camping, livestock, or installing solar panels. The sky's the limit when it comes to how you can make money with land.
Settle Onto Your Own Land with Land Loans
We hope you’ve found this article on land loans useful in your search for financing. Purchasing land can be a tricky process if you’re not sure what you’re doing, but now that you know a bit more about it, you should be ready to find the best lender for your situation.
Investing in land can be a great way to increase your portfolio. Add this tangible asset to your list and give your future generations something to value when space becomes a coveted commodity. Or, use it to fund other projects that keep your family traditions alive.
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