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If you’re thinking of investing in land and need to finance the purchase, it doesn’t make sense to apply for a traditional home loan. In this case, you’ll need to apply for a land loan, and the process is likely different than what you might expect.
With that in mind, here’s a real estate investing guide to land loans. We will cover what a land loan is, the different types of land loans available, and what you should know about applying for this type of real estate financing. Read it to determine if getting a land loan is right for you.
What is a land loan?
As the name suggests, a land loan is used to finance a tract of land. Put simply, if you want to buy a plot of land, you wouldn’t use a traditional mortgage to finance the purchase; you’d use a land loan instead. However, since there’s less interest in buying undeveloped pieces of land, these loans are less common than most other types of financing.
Though not always the case, sometimes investors will use this type of loan to facilitate a land purchase, intending on developing the land for a residential or commercial purpose later on. Often, these loans are more common in rural areas where land is more likely to sit undeveloped for a longer period of time.
Types of land loans
In total, there are three different types of land loans. If you’re thinking of obtaining financing for a land purchase, be sure to ask your lender if they have experience with the type of loan you think best suits your needs.
Raw land loan
As you might be able to guess from the name, a raw land loan is used to finance the purchase of completely undeveloped land. You’ll use this type of loan if you’re interested in purchasing bare land, meaning no electricity, sewer, or roads connected to the property.
This is often the most difficult type of land loan for which to receive approval. Since the land is totally undeveloped, it presents the biggest risk for the lender. So if you’re going after a raw land loan, make sure you have a cohesive plan for how you intend to use the raw land. The more details you can provide the lender, the better.
Unimproved land loan
Unimproved land is similar to raw land, except it tends to be slightly more developed. For example, a piece of unimproved land might have access to electricity and gas lines but lack the meters and equipment necessary to actually use these utilities.
Since unimproved land tends to be more developed than raw land, it also tends to be more expensive. But that means it may be easier to qualify for an unimproved land loan, since the lender may view the lot as less of a risk.
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Finally, there’s an improved land loan. Improved land typically already has access to things like roads and utilities. Again, while this likely will be the easiest type of land loan to be approved for, it also will be the most expensive because the land is the most developed.
Land loans: pros and cons
Investors, especially new ones, tend to wonder what the advantages are of getting a land loan over something like a construction-to-permanent loan, which lets you roll your costs for buying and building into one mortgage payment. But there are a few benefits to going after a land loan. Read them to see if a land loan might be the right choice for you.