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February 02, 2024

Essential Steps to Secure the Right Loan for Your Land Purchase

Looking to purchase land for your dream home? This article outlines essential steps to secure the right loan for your land purchase. From understanding the types of loans available to assessing your financial situation and navigating the approval process, we've got you covered. Plus, we offer tips to avoid common pitfalls and highlight how you can finance the market value of the lot with a low down payment. Some lenders, for example, calculate fixed-rate payments using up to 20-year amortization on their home lot loans, with a five-year balloon payment, and amortize adjustable-rate payments over 15 years.


This blog is for educational purposes only, not an offer of credit or advertisement for current loan terms. It does not provide legal advice. Refer to our loan web pages or consult professional advisors for specific information.

You’ve found the perfect plot of land for your future home build. How do you find the right loan to purchase it? Fortunately, loans for land purchase are structured solely for purchasing your ideal residential lot. Then, you can hold onto it until you’re ready to build. In this article, we’ll explore the crucial steps borrowers should take to secure the right loan for a land purchase.

What kind of loan is used to purchase land?

Various types of loans can be used to purchase land, depending on the purpose of the land. Common types of loans used for land purchases include:

  • Raw land loans: Used to purchase undeveloped or raw land without any existing structures.
  • Lot loans: Designed for the purchase of residential lots where the borrower intends to build a home in the future.
  • Construction loans: For financing the construction of a structure on the purchased land.

Raw land loans are for vacant, undeveloped land, while lot loans are specifically tailored for the purchase of residential lots. Construction loans generally include the purchase of land but are structured to cover both the land and construction costs. If you are planning to purchase a residential lot for a future home build, a lot loan is the best option. It allows borrowers to purchase the lot they want without the pressure to immediately build.

How long are most land loans?

The duration of land loans can vary based on the lender, the type of loan, and the specific terms negotiated between the borrower and the lender. However, land loans generally have shorter terms compared to traditional home mortgages. Most land loan terms are around five years. Some lenders, for example, calculate fixed-rate payments using up to 20-year amortization on their home lot loans, with a five-year balloon payment, and amortize adjustable-rate payments over 15 years.

How to get a loan to purchase land

Borrowers can access a home lot loan through a reputable mortgage lender. The easiest way to get a loan for land purchase in Florida is with a credit union familiar with the location of the land. Let’s review the steps involved in securing the right loan for your land purchase:

  1. Assess your financial situation: Land purchase loans require a strong credit score and down payment. Your lender will need proof of your income and employment, and will calculate your debt-to-income (DTI) ratio. Prior to applying for a home lot loan, it’s a good idea to evaluate your financial situation and pinpoint areas that need improvement. A higher credit score and lower DTI ratio are always better and can contribute to more favorable rates and terms. Download your free credit reports, calculate your DTI, and save enough for at least 20 percent down.
  2. Determine the purpose of the land: What are your goals after purchasing the land? Do you intend to hold onto it for several years, or build within the next year? Is the home going to be your primary residence? These factors influence the type of loan you need. If you intend to build your home soon after you purchase it, a construction-to-permanent loan may be a better option. If you plan to build an investment property, you may need a different type of loan.
  3. Connect with a lender: Once you have identified the purpose of the land and have a plan for when you are going to build your home, you can start the application process with a lender. Make sure you connect with a lender who has experience with home lot loans and is familiar with your lot purchase location. A lender familiar with your lot purchase location is likely to be aware of local requirements, site-specific challenges, unique requirements, specialized loan programs, and more.
  4. Get pre-approved: Mortgage pre-approval is a crucial step in the land purchase process. It provides borrowers with a clear understanding of their borrowing capacity and strengthens their position as a serious and qualified buyer. To get pre-approved with your lender, you will supply them with information about your financial situation and the residential lot you intend to purchase. Once pre-approved, you can move through the rest of the home lot loan process with confidence. Your lender will guide you through the full approval process and request the necessary documentation and land information.
  5. Close on the loan: Once your land loan is approved, you’ll review the final terms and conditions, sign the necessary documents at your closing appointment, and complete your land purchase!

Factors influencing land loan approval

Lenders assess several factors to determine a borrower’s eligibility and the terms of the loan. To get yourself in the best possible shape for a loan to purchase land, focus on the following requirements:

  • Credit score of at least 700
  • 20% down payment
  • Low DTI ratio
  • Consistent income and employment

Ask your lender about their specific requirements and documentation needs so you can be as prepared as possible.

How to avoid common pitfalls

Purchasing a residential lot is a new experience for many types of borrowers. Here are some helpful tips to keep in mind as you prepare for this exciting process:

  • Research the property: Conduct comprehensive due diligence on the land and seek professional advice to understand all aspects before proceeding
  • Get pre-approved: Prioritize pre-approval to understand your borrowing capacity and strengthen your negotiating position
  • Understand the loan terms: Review all loan terms and seek clarification from the lender if needed
  • Accurately estimate all costs: Create a budget that considers all associated costs to avoid financial surprises
  • Understand the down payment requirements: Ensure you have the necessary funds before applying for a loan
  • Seek professional advice: Consult with real estate attorneys, land surveyors, or environmental experts

Your mortgage lender is a key player in the success of your land purchase, and will offer support throughout the process.

 

Start your application with MIDFLORIDA Credit Union.