Summary: In this article, the three most crucial things regardingland loans will be discussed so that you can select the best option depending on your budget.
When searching for a home to buy, future homeowners may sometimes think about building one. The idea might seem ideal before realising how much a house might cost to build.
There are several ways to reduce the cost of home construction for first-time homeowners, even though it can be quite expensive – and a land loan is one of them.
Understanding the fundamentals of land loans is crucial to making a well-informed decision. So let's dive into the details!
Land Loan: All You Need to Know
If you want to build a house from scratch rather than buy an existing one, you will need a plot first. A land loan, also known as a lot loan, is a way to finance the acquisition of a piece of land. Your chosen type will depend on where you plan to buy land and how you'll use it.
Some people confuse a land loan with a construction loan, another kind frequently used by those looking to construct a home. Typically, you'll need a construction loan to buy land and start constructing on it immediately. These quick loans are designed for aspiring homeowners ready to start constructing their homes immediately and have everything planned out and prepared.
Land loans are a better option for those home buyers who have everything planned out but don't want to start executing it immediately. Listed below are the three types of land loans you need to be aware of:
Raw Land Loan
As the name suggests, this type of loan is for lands that have not been developed. A raw land loan is relatively harder to obtain, but if you have a solid strategy, you will have a higher chance of obtaining the loan.
Besides that, keep your credit score in check because that's one of the many things that will show lenders your commitment. Remember that the interest rate and down payment for raw land loans will be higher than the other kinds.
Unimproved Land Loan
Raw land is comparable to unimproved land, but unimproved land is typically more developed.
This type of loan can be a bit challenging to obtain, so make sure you have a well-thought-out plan, a strong credit score, and enough money set aside for a down payment.
Improved Land Loan
Unlike undeveloped land, improved land has access to resources like roads, electricity, and water. An improved land loan is an obtainable loan with lower down payments and a lower interest rate.
The cost of improved land is higher than the other kinds, so save money accordingly and make sure you opt for the right plan.
3 Vital Facts About Land Loans That You Must Know
Now that you know the kinds of land loans you can obtain, it's time to learn some vital land loan facts before committing.
Land Loans Require Larger Down Payment Amount Compared To Traditional Loans
To obtain a land loan, you will need to make a down payment of at least 20% of the land's purchase price to the lender. That's because there are no structures or additional improvements on the asset that can be used as collateral for land loans.
So, make sure that you prepare yourself well before closing the deal. You can also use the housing loan EMI calculator online to understand how much you will pay in the course and better understand the loan plan.
Land Loans Cannot Be Used For Construction Purposes
As previously discussed, construction loans and land loans are often confused. Opting for a land loan is great if you plan to purchase land or improve the one you already own. If you plan to build a house, opt for a construction loan instead.
Land Loan Terms Are Short, And Rates Of Interest Are High
Land loans have higher interest rates than other types of loans, along with a shorter tenure. The loan amount, down payment amount, and borrower's CIBIL score heavily influence these factors.
So, use a housing loan EMI calculator to find the suitable tenure and interest rate based on your requirements.
Conclusion
Purchasing a property is a huge financial decision; one tiny mistake can lead to big consequences.
Be sure to read all the term documents carefully, consider all the points mentioned in this article, and clear any doubts you have with an expert.
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