If you're eyeing a piece of land rather than an existing house because you want to build from scratch, you probably won't be able to get a regular mortgage to finance the purchase. This is where a land loan comes in.
A land loan – sometimes referred to as a lot loan – is used to finance the purchase of a plot of land. You can take out a land loan if you're interested in buying a piece of land to build a home or use for business purposes. The type you take out will depend on where you're buying land and how you intend to use the land. On the other hand, land or lot loans are a better choice for future home builders who have plans but may not want to jump into the building and finance a house immediately.
Some land loan lenders require a substantial down payment — ranging from 20 percent to 50 percent of the purchase price — and charge higher interest rates. Others have significantly shorter repayment terms than a 15- or 30-year mortgage or specific requirements, like a cap on the amount of acreage.
However, applying for a land loan and receiving the funds is similar to a typical mortgage. The lender will run a credit check and evaluate the financial documentation you provide to ensure it matches what's on the application.
Getting a land loan is more complicated than obtaining a traditional mortgage because buying land isn't as straightforward as buying a home. Many banks and credit unions do not readily offer land loans, so you must be very specific about the land you purchase and be prepared to provide surveys and zoning information about the land you wish to build on.
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