Loans on land come in all sorts of shapes and sizes. For instance there are land development loans, land equity loans, land purchase loans, raw land loans, vacant land loans …. the list goes on.
Banks vary in their willingness to finance loans on land, depending on what type of loan it is. However, whichever type of land loan you are looking for, there are a number of criteria you have to meet in order to be eligible.
So what can you do to make sure you have the best chance of getting hold of one of these loans on land? What you need is to be clear about what a lender will be looking for. There are three main factors that will influence the lender.
- Ability to repay. When you apply, lenders will of course look at your ability to repay. They will certainly check your credit history, and will scrutinize your tax returns and your bank balance sheets – personal, and corporate if you have a business. If you get all this information ready and organized before beginning the process, you will greatly reduce the waiting time for your application to be approved. Plus of course you will impress them with your business-like approach! The better they judge your repayment capability to be, the higher loan-to-value they will be likely to offer – and of course the lower your down payment will be.
- The value of the land. The lender will conduct a detailed appraisal of the land value. The appraised value will depend to a large extent on what you intend to use the land for. Generally a vacant land loan will not be provided for land being purchased for commercial or industrial use – it needs to be categorized for residential or agricultural use. Whatever the stated purpose, the appraisal must show the land as being suitable for this purpose. The lender must also be satisfied that electricity and sewage are available or if not, that they can be installed without major problems. The appraiser will also look at the reasonableness of the purchase price compared with the appraisal value.
- Value of collateral. The standard LTV (loan-to-value) ratio for loans on land is 60-80 percent, which means you are likely to need a down payment of at least 20-40 percent. The LTV ratio partly depends on the location of the land – land in a platted subdivision will attract a higher LTV than a stand-alone parcel. However even a 20 percent down payment can be a very large amount of money. If you have substantial equity in other property, for instance your own home, this can be taken as collateral for your loan, so there will be no need for a cash payment. Remember you need to be very clear about the level of risk involved in your project before taking this step – it’s essential to consult a financial advisor before committing yourself.
Banks tend to be more wary when considering requests for loans on land – not surprisingly, given that land is generally seen as more of a risk than buildings. You need to be very clear about your purpose in wishing to acquire the land. You also need to be sure you have all the required information available before starting your application. If the lender can see that you are a reliable borrower with a worthwhile project, you should have no trouble in obtaining a favorable loan.