The loan terms buyers are subjected to by banking institutions differ. They depend on the financial institution, your personal situation as the borrower and prevailing market conditions. Here are some insights to help you when looking for an option to finance land today.
Details behind the land and lot loans
Financial institutions classify lot and land loans differently when approached to finance land today. Purchase for money loan is more viable from their point of view. This might have been due to bad loans, regulatory restrictions or other prevailing market conditions. Today, several banks have digressed from the lot and land loan programs.
Due to this, acquiring this type of financing is quite difficult. When the competition for lending is low, the borrowers have fewer options at their disposal. This gives the bank all the leverage when negotiating the terms.
The down payment
Lot and land loans require high down payments from their borrowers. Your loan amount and the balance to be paid by the borrower as down payment is arrived at by the Loan-to-Value ratio. The loan amount is divided by the property’s value to arrive at the LTV.
Borrowers receiving a lot and land loan will get a lower LTV
ratio. This ratio is used by the lender when comparing the purchase loan money for the home. The lower the LTV, the higher the percentage down payment required from the borrower. For example, a borrower of an existing home can experience a 100 percent LTV, which means no down payment is required. Borrowers for finished lots can get 90 percent LTVs. On the other hand, those opting for the undeveloped or vacant property may be limited to an LTV of 70 percent. In worst case scenarios some banks might even offer non-negotiable LTVs worth 50 percent.
Land and lot loans are mostly short term. Unlike the pre-existing home mortgage loans which can stretch on for three decades, this types of loans are more constricted time-wise. Lot loans are usually restricted to certain payoff dates. Reason being, the lender anticipates that the borrower is building a
home in the immediate future. The lender also expects that the borrower will be paying off this loan with a permanent or construction loan. Usually, the borrower is compelled to commit to a statement of intent that the property’s
construction will commence on a particular date.
The lot or land loans are amortized over a shorter period. This translates into higher monthly payments. The purpose of amortization is to determine the principal and interest. This determines the loan repayment schedule given a certain period.
The rates of interest greatly vary when land and lot loans are compared. Unfortunately, they have higher interest rates when compared to the purchase money loans. Some lenders require their borrowers to make interest-only payments on their lot loans.
Lenders use the value of the land as collateral when issuing home loans. When searching or a lot and land loan lenders require that you produce additional collateral or provide personal guarantees. Some banks prefer the borrower to have significant banking deposits or any other liquid financial assets.