A lot of prospective land buyers are wondering, is it possible to get a mortgage loan for a land purchase? Fortunately, the answer is yes, and surprisingly easy.
It’s a common misconception that you can’t get a mortgage loan for land, but this is not the case. There wouldn’t be much difference in qualifying if one were purchasing an existing structure or vacant ground.
Read on to find out more about mortgage loans for land purchase.
What Is a Mortgage Loan for Land Purchase
A mortgage loan for land purchase is a type of real estate investment. It works by allowing you to borrow money from the bank and use it to buy property, which will then be paid off with monthly repayments over time until they are totally repaid into your account.
A mortgage loan for buying land creates an opportunity for investors looking at long-term investments in residential or commercial properties with significant potential but do not have enough money to finance the purchase.
How Do I Get a Mortgage Loan for a Land Purchase
Find a Good Lender
There are a lot of factors to consider when you’re getting ready to buy your first home, such as where the property is located and how much it costs.
But one thing that often goes overlooked by those just starting out in their mortgage-searching journey is finding an affordable lender who offers competitive rates for lending on mortgages.
A land mortgage calculator can be a really helpful tool during this process, which allows you to see how much in monthly payment you need to make with certain lenders and compare the interest rates and total cost.
Pre-approval vs. Pre Qualification
If you’re considering purchasing new land, getting initial approval from your mortgage lender before shopping for homes is necessary.
Getting approved upfront can tell you how much of a budget you have to spend to avoid wasting time checking out properties outside of your budget range.
Mortgage lenders use many terms – including “approval,” “pre-approval,” and “pre qualification” – to describe this process. But what’s the difference, and which is important?
A mortgage pre-qualification is used to estimate how much loan the lender should give you based on your income and finances. This type of evaluation does not require you to provide your credit score.
On the other hand, preapprovals are more thorough. They involve filling out an application form with all financial information upfront so that lenders can run checks on your Social Security Number for credit checks.
If you have been thinking about buying a home but are concerned that your credit might be an issue, the time to take care of it is now. Pre-approvals can help identify credit issues, which could make it easier for you to get your mortgage.
The Pre-Approval Process
Applying for a mortgage for land purchase can be exciting and confusing at the same time. There’s no exact timeline as to when you’ll get pre-approved.
Some online lenders will only take a couple of hours, while traditional lenders may take weeks, depending on your finances and your lender’s policies.
A mortgage loan application features;
- Type of mortgage and the loan terms
- Property information and purpose of the loan. Choices will include purchase, construction, and re-finance. In this case, you’ll fill in the purchase.
- Your identifying information, including name and SSN
- Employment history and information
- Monthly income and expenses.
- Assets and liabilities
- Key transaction details such as purchase price and loan amount
- Declarations such as past bankruptcies, debts, and pending lawsuits
Hence, choosing the right lender for your home loans is important. In addition, you need comprehensive knowledge about your state’s loan process. For instance, if you live in Florida, you not only need a trusted lender but also need to know the rules and regulations around Florida construction loans.
Who Qualifies for a Mortgage for Land Purchase?
Within three days of receiving your mortgage application, the lender will send you a three-page document called the loan estimate.
It details whether or not it has been pre-approved and outlines all aspects such as loan amount, interest rate, terms, and estimated monthly payments for mortgages.
However, there are some factors that affect whether or not you qualify for a mortgage loan. These include;
Your credit score will play a huge part in determining whether you get a loan, the loan amount, and interest rates. Most lenders require a credit score of between 680- 700 to get a land purchase mortgage. Those with even higher credit scores get better terms and lower interest rates.
Debt-to-income (DTI) ratio
The debt-to-income ratio is a measure of affordability for prospective homeowners. This ratio calculates the percentage of one’s income that can go to housing costs like mortgage payments, loans, and credit cards compared to their total gross income.
The higher this number goes above 36%, it becomes more difficult to qualify for a traditional loan from banks or other lenders as they will see an increased risk of defaulting.
To qualify for an affordable mortgage with most banks these days, one must obtain at least 20% -25% of equity by paying upfront on land price through savings.
It’s not enough to qualify for a mortgage, but it can make the difference between getting approved or denied. The loan-to-value ratio is approximately how much of your home you own compared to what you owe on the value.
Getting a mortgage loan for land purchase is possible. To qualify for the loan, ensure your credit score and DTI is in check. You might also have to make a down payment as part of your lender’s requirements.