If you invest in properties, you may find yourself needing a loan in order to do so. But when purchasing undeveloped property you may be wondering whether you need a land or lot loan. Since banks treat these loans differently, you should understand which one will best serve your needs.
Differences Between Land and Lot Loans
Land and lot loans differ in their availability, required down payment, length of loan, interest rates, and collateral. It can be difficult to find a bank that will extend you either a land loan or a lot loan. Most banks would rather give you a loan for a property that is already developed, as they are wary of undeveloped property.
Since both land and lot loans are a huge risk, they often require an extremely high down payment. Lenders use a loan-to-value (LTV,) ratio when determining how much money they are willing to give you. They calculate this amount using simple division. The value of the property is divided by the potential amount of the loan.
Land and lot loans often come with a smaller LTV loan than you would get to buy an already developed property. A typical LTV is 100%, so no down payment is needed. In comparison, LTV for undeveloped property can be around 70%, meaning you’d have to pay 30% as a down payment.
The typical land and lot loans are only short term. In most cases, you have a few months to a few years to pay one back. Most lenders assume you are buying the lot to have a home built on it. They assume the remainder of the land or lot loan will be paid off using a construction or other similar type of loan.
Interest rates are generally much higher for land and lots than any other type of loan. In many cases, lot loans task borrowers with making only interest payments.
Collateral is often needed when taking a land or lot loan. This is because without a home on the land, lenders have no guarantee of making back their money. They may ask for something else to be used as collateral in order to approve you to borrow money.
For more information on loans for undeveloped property, please contact DAL Commercial Capital.