Land Loans: Are They Worth It?

With the price of existing homes in Silicon Valley resting at all-time highs, some homebuyers and developers are exploring opportunities to purchase land – here’s a quick primer on the financing behind land acquisition transactions.

Land and Lot loans are sometimes used synonymously but there is a technical difference.  ‘Land’ is typically used to mean any piece of property without any habitable structure on it – whether residential, commercial or agriculture, which typically needs to be razed, whereas a ‘Lot’ is a property that is ready to support the building of a house.  Lots may or may not have utilities on site, but hookups are generally close by.

Any kind of land financing is going to be a short-term strategy that evolves into a construction loan which is why terms are usually less than a year, however, can go as long as 5 years.  Down payment typically will require 35-40% of the purchase price but may be less if the lot is part of a subdivision where you can build immediately after acquisition.  Everything else about land/lot loans is similar to standard conventional loans, including documentation, credit, and asset reserves.  Closing costs can be slightly higher (2-4% loan fees are typical), but still comparable to what you may find in conventional settings, and closing time can be as little as 21 days.

If you are considering acquiring land, these programs offer more flexibility than conventional loan products (which are usually limited in loan size and lot size).  And of course, be sure to consult a mortgage broker who has experience dealing with land loans.