Lot and Land Loan Calculator

Land loans vs. home mortgages

Land loans are typically riskier for lenders than traditional mortgages because borrowers are more likely to walk away from property loans than a mortgage. Many lenders will charge higher interest rates on land loans to offset the risk of borrowers defaulting. Houses are also more valuable on the market, so they’re better forms of collateral.

Financing restrictions

Land loans can be subject to restrictions, such as:

• Lending limits—Lenders can cap the amount of money you can borrow even if you have a good credit score. They do this to offset the risk associated with property loans. If you have bad credit, your limits will be even lower.
  
• Bigger down payments—Lenders often require bigger down payments on property loans than home loans and can be as high as 20% to 50% of the total loan amount.
  
• Higher interest—Because land loans are high-risk, lenders will often have higher interest rates.
  
• Short loan terms—Property loans usually have shorter repayment terms and are more restrictive.
  

Lenders may require additional fees on top of the loan. They typically use these fees to pay for

• Land appraisal
• Title search
• Land survey
• Attorney fees
• Title insurance

Owner financing

With owner financing, buyers can pay for land without relying on a traditional lender. Instead, the person selling the land finances the purchase, often with an interest rate higher than current land loan rates. When buying land, there are two types of owner financing—a land installment contract and deed of trust.

• Land installment contracts let buyers pay the land seller in installments over a period of time. There is usually a final balloon payment due after five years.
• As part of a deed of trust, the seller issues a deed to the buyer in exchange for a promissory note and mortgage. The promissory note ensures the seller is paid and the mortgage is used as collateral.

Borrowing against home equity and 401(k)

If you have adequate home equity, you can borrow against it to purchase land. Home equity loans are easier to obtain if you have good credit and have made your mortgage payments. These loans usually have lower interest rates and better repayment terms.

You can also use your 401(k) to purchase land if your employer lets you borrow money from the retirement plan. Borrowing against retirement savings can cost less than traditional financing options. However, even if your employer enables you to borrow against your 401(k), you can only access short-term loans. This may or may not be enough, depending on the price of the land you’re purchasing.