Land Loans VS Mortgage Loans

If you are a property developer, or in the construction business, you may be searching for a land loan in order to purchase the land you intend to develop.

You may not be ready to build at the moment, but the property might be in a location that is hot and rapidly selling out.  The most common type of land loans are for builders and developers who want to lock up that piece of property for future development, yet aren’t ready to begin construction at the moment.  They are not hard to find and land loan rates are often negotiable based on your company’s history and credit worthiness.

Often private individuals spot a piece of property where they would like to have a home built either now, or at some point in the future.  If there are currently no developments on the property, then a land loan would be the way to borrow money in order to purchase that property to be developed at a later date.  Land loans are available if the property is undeveloped.  If there is construction on the property you wouldn’t be looking at land loans, rather you would need to apply for a conventional mortgage loan.

There are times when communities grow at such a fast rate that developers plan shopping plazas or malls in order to grab a rapidly growing market area.  If the developer is not quite ready to build yet, but wants to snag that location, he would probably apply for one of many available commercial land loans.  At some future point when he is ready to build, he can then borrow money through construction loans to be used for the actual development of the property.

Land loans are an integral part of the development of any housing developments.  Builders begin with a land loan.  Once the land has been graded and readied to be built on he then acquires construction loans.  The land loan and the construction loan are then paid back in full upon sale of the property.  Land loans and construction loans are often short term loans.  They may come due at six or twelve month periods.  If the property hasn’t sold, land loans and construction loans are often renewable.

Sometimes several developers and construction companies develop a neighborhood.  If a builder only wants to develop a portion of the land in the development he usually applies for a type of land loan known as lot loans.  Because he is only going to build on a lot or perhaps a few lots in the development they are referred to as lot loans.

The basic difference between a mortgage loan and a land loan then is whether or not there is any construction on the land.  Mortgage loans are for properties that have been developed while land loans provide funds to purchase the land for future development.

Choose Carefully!

There are many different types of land loans available to investors and this article is going to examine each one individually to facilitate your decision on which one to pursue.
First there are vacant land loans. These are designed specifically for the need of purchasing land that is currently undeveloped.  In this case, even though the property is undeveloped, plans for development can be made since utility lines should be fairly easy to establish.

Secondly there are improved land loans. These are loans designed for land that has been partially improved and is in some kind of construction process. Improved property loans are sure to be much more preferable to lenders than any other type since they can be much more confident that development will take place in this land so their risk of not recouping the loan plus the accrued interest rate is much lower. Such improvements can include already established access to lines of utility, finished or even partially constructed structures or connection to a road network.

The next type of loans we will consider is raw land loans. These are loans designed specifically for land that has no trace of improvements at all. This means for example that there are no present utility lines like water or electricity, or furthermore that access to them is difficult. This type of loan is much harder to secure than the rest as the purchaser has a much lower stake than in other cases as the land is completely undeveloped. This on the other hand increases the risk for the lender which in turn means that he will probably require a higher down-payment and request much more information about plans for development such as access to utilities or building plans.

Even though it is not a type of land loan, it would be wise to include construction loans in this article. This is due to the fact that it will be in most cases associated with the above types of loans if the land is destined for any kind of development. This type of loan may not make sense for someone who has bought land with no plans for commercial development or for personal use but it most certainly does make sense if someone intends for example to build a lot of residential structures on his land. The way to secure such a loan is to provide adequate information about the type of construction you are planning to do.  Every type of loan above can be used in order to acquire property for residential or any other kind of commercial development. If that’s the case, then a construction loan is the way to go but always bear in mind that adequate information about your plans must be presented in order to secure one.