Found the perfect block of land and want to know the best way to buy it? Read on.
Introduction to Land Loan
We have people contacting us every week to ask about how to go about buying their perfect block of land. Some want to build their dream home, others are looking for a sound investment.
It’s a little different to buying an existing home
The good news is that the brokers we work with are experts when it comes to land loans and will be able to guide you through the pitfalls and find you the best deal.
In this article we’ll cover some important things to think about before you commit to a land loan –
- What is a land loan?
- Do I need a deposit for a land loan?
- Are they the same as construction loans?
- Choosing the right land loan
- So which lenders offer land loans
- Is there an alternative to a land loan?
- What other factors could affect getting a land loan?
- Can I get a land loan for a farm?
- Can I get a vacant land loan with bad credit?
- Do I need to talk to an expert
What is a land loan?
Simply put, a land loan or vacant land loan is a type of home loan or mortgage that buyers apply for from a bank or other financial lender to purchase an empty block of land.
For most people, the intention is to build a house on it at a later date. The difference is that unlike a standard home loan, it often comes with different costs and conditions that have to be met
Do I need a deposit for a land loan?
Yes, and because land loans are seen as a riskier proposition than a standard home loan, they usually require a higher deposit, and on top of that, the lender is also likely to charge a higher interest rate.
The size of the block is something you need to consider as well, because generally the larger the block, the lower the proportion of the value of the property you’ll be able to borrow. This then drives up the amount of deposit you’ll need.
All lenders are different though, so it could pay to talk to one of the expert brokers we work with to see if they can find you the best deal.
Are land loans the same as construction loans?
Not at all. The main difference is that with a construction loan you’ll need to fully complete the house you are building within a set time limit, which is usually one to three years depending on what you have agreed with the lender.
Land loans don’t have the same urgency to build, so you can delay construction. Also, unlike a construction loan, all of the monies are released immediately, as opposed to being drawn down progressively at each stage of construction.
Land loans are quite often used instead of construction loans when the person borrowing the money believes they won’t be able to start construction or complete building for at least twelve months.
Choosing the right land loan
Here are a few things to think about before choosing a vacant land loan lender.
Banks are pretty conservative when it comes to applications for a land loan. Most lenders consider land loans to be high risk when compared to other types of home loan.
The main reason is that land prices can fluctuate more than the value of an existing home, and vacant land has traditionally taken longer to sell, so lenders could be stuck with a plot of land with no home on it.
Also, if the person applying for the loan has no intention on building on it in the near future, then lenders may consider them to be speculative investors, and be even less inclined to offer a loan.
It’s for these reasons that vacant land loans are harder to find than construction loans. There are specialist lenders who offer vacant land loans, and the expert brokers we work with know who they are. You can make a no obligation, no cost enquiry here.
So which lenders offer land loans?[vc_column_text]As mentioned above, large national banks are increasingly reluctant to handle land loans.
The good news is that there are community banks and credit unions who are more likely to offer a vacant land loan.
It’s a good idea to find a lender that has a physical presence near the block you want to buy – the advisors we work with can help you find the best lenders in your vicinity. These local lenders know the area and are best placed to assess the value and potential of a block of land.
Is there an alternative to a land loan?
If you can reasonably start building your home in the not too distant future, then a construction loan may be the best option.
There are many more lenders who offer this type of finance package, which means you have a better chance of finding the best deal. You can find out more about construction loans here.
What other factors could affect getting a land loan?
It’s location, access and zoning regulations will all have a bearing on whether a lender will consider your application.
If the block is in a capital city or regional centre and access is via a sealed road, then you are more likely to be successful than trying to get a land loan for a block in a remote area that requires a 4WD to reach it, which could be difficult in the extreme.
The reluctance of lenders to offer land loans also applies to undeveloped blocks, i.e. those that do not have water and power connected, or sealed roads
Farm land loans
Most lenders set a maximum size of a block they will lend on. Any larger than that and they will consider it a ‘lifestyle block’.
You’ll need to show the lender what you intend to use such a large block for.
A large acreage will be considered a residential property (up to 10 hectares) as long as you don’t intend to generate a sole income through farming activities.
The good news there is that you’ll avoid the higher interest rates that come with a commercial loan and you can still generate a bit of income through small scale farming if you wish.
It’s because many of these blocks are purchased for recreational and light farming that they are often called ‘hobby farms’.
If you do intend to buy land for farming, then you can find out more about commercial loans here. You’ll also need to present a sound business plan that demonstrates you have the knowledge and expertise to run a farm successfully
Can I still get a vacant land loan with bad credit?
With the already limited number of lenders who will consider an application for a land loan, your options become even more limited. With the right advice from one of the brokers we work with who are experts at finding the right loan for people with bad credit.
It all depends on a number of factors such as –
- The age of credit history issue (the older the better).
- What the outcome of the issue was (whether it was finally settled or not).
- The type of the credit issue or judgments (such as a telco, utility or financial institution default). Generally, telco and utility-related defaults are less severe than financial default listings.
- Your more recent credit history.
- Your current employment situation.
If it’s at all possible to get a vacant land loan, they will be the ones to find you the best deal for your circumstances.
Check out our guide to bad credit mortgages here, or better yet, you can arrange a no-obligation consultation here with one of the advisors we work with. They are experts when it comes to helping people with bad credit find a mortgage.
Why should I talk to a whole-of-market broker?
Not all brokers are the same. Some have access to just a few lenders, whist others, like the brokers we work with, have access to the whole market, and so they can find the best deals for your circumstances, even if you’ve had bad credit in the past.
The brokers we work with have passed a 12 module training programme and are experts in their particular area.
We don’t charge a fee and there’s no obligation, just the right advice every time – make an enquiry here and we’ll connect you with one of them today.