If you are buying a house, getting a mortgage can be a stressful, lengthy process. That being said, if you have the necessary qualifications and you’re buying a fairly straightforward property, getting a home loan is pretty streamlined. After all, most people who buy homes these days do so with a mortgage.
What if you want to buy a property that doesn’t have a house on it, though? In this instance, a home loan simply won’t do.
Depending on what you want to do with the land and how soon you want to, there are a number of different types of loans you can pursue. One of these is a land loan.
What’s the difference between a land loan vs. home loan, though? Let’s take a look at what you need to know.
What Is a Home Loan?
If you aren’t familiar with the term home loan, you likely have heard of a mortgage before. These are interchangeable terms. Getting a home loan is the most common way that Americans buy houses, as many people don’t have the cash to buy homes outright. Even if they do, there is some logic to taking out a loan regardless, particularly during a time when interest rates are low.
Put simply, mortgages are an agreement between a borrower and a lender. The borrower only has to put some cash down in the form of a down payment, and otherwise pays the lender back in monthly installments through an amortized loan. The catch is that if you default on your payments, the lender can repossess the property from you.
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What Is a Land Loan?
You might also hear land loans referred to as lot loans. This is a type of loan that is used to finance buying a piece of land rather than a property with a home on it. You might want to take out a land loan if you want to buy land in order to build your own house or to use it for commercial reasons.
Both the location of the land and your intentions for the land will inform the type of loan you take out.
People sometimes confuse construction loans with land loans. People also use construction loans in order to build houses. The difference is that construction loans are short-term loans that are intended for people who are planning on starting building their homes right away when they buy their land.
In these cases, the buyers already have all of their plans worked out and are ready to break ground once they have taken possession of the land.
On the other hand, land loans are a better choice for people who aren’t ready to build or finance building a house right away. If you don’t plan on building for a year or more, you’ll probably want a land loan instead of a construction loan.
Three of the most common types of land loans are known as improved land loans, unimproved land loans, and raw land loans.
What Are the Main Differences Between Land Loan Vs. Home Loan?
Land loans and home loans are not the same, and the process of obtaining them can be quite different. Let’s take a look at what you should know.
Lenders See Land Loans As Riskier Than Home Loans
One of the main concerns of lenders is how much risk they are taking on by loaning you money. Basically, they want to try and figure out how likely you are to pay them back. When it comes to home loans, lenders at least know that they can foreclose on your house if you default on payments.
However, with a land loan, there is less certainty for them that they will be able to recoup the cost if you stop making payments.
The Interest Rate for Land Loans Is Typically Higher
Since lenders see land loans as riskier than mortgages, they only lend them out at higher interest rates. This can mean paying a lot more money towards interest over the life of the loan.
The Terms for Land Loans Aren’t Usually As Favorable
The terms for land loans are also typically less favorable than for home loans. The pay-back period is often shorter than the typical 30-year loan for homes. This means that your monthly payments will be higher since they are spread out over a shorter time period.
Is a Land Loan Right for You?
As you can see, getting a land loan can be a bit more complicated than getting a home loan. That being said, it isn’t impossible by any means.
If you have decided that a land loan is the proper type of loan for your purposes, it is usually best to try and get them from a credit union or a community bank that is close to the property. However, if you are expecting to build a house that will act as your primary residence, you might find that it’s better to apply for a USDA loan or a USDA construction loan.
If your purposes for the land are commercial, you could also apply for an SBA 504 loan. These are designed for businesses that need to borrow money in order to buy land as a part of their business operations.
Did you find this article comparing a land loan vs. home loan useful? If so, be sure to check out the rest of our blog for more informative and educational articles!
