Texans love land, whether it be massive ranches or small home lots. And there’s plenty of land to love in the Lone Star State – nearly 172 million acres.
A lot of folks in Texas are eager to own a piece of Texas where they can build a home. In many cases, this means you’ll need to take out a land loan to buy a home lot or some acreage. Follow along to learn what you need to know about Texas land loans.
What Is a Land Loan?
A land loan, sometimes called a lot loan, enables you to purchase a plot of land where you can build a home. Generally, a loan can be taken out for three types of land:
- Raw land, which normally has no utility access and no improvements, and might not be reachable by road.
- Unimproved land, which typically has utility access but might be without some improvements.
- Improved land, which normally offers complete access to utilities and can be reached by road.
How to Get a Loan for Land
Getting a land loan is similar to getting a home mortgage. Both involve real estate, and both usually involve the same steps: application, credit check, survey, appraisal, and closing. Just as with a home mortgage, you can be prequalified for a land loan.
Before applying for a land loan, be sure to check your credit score and credit report to see whether you need to do anything to boost your score (and possibly obtain better lending terms) or to fix any errors on your credit report that might hinder your ability to get the loan.
Your creditworthiness plays a big role in determining how much money you can borrow for a land purchase. In addition to a high credit score, a low debt-to-income ratio likely will lead to better lending terms, such as a lower interest rate. How do you calculate the debt-to-income ratio? Divide your monthly debts by your gross monthly income.
It’s worth noting that some lenders may allow you take out a personal loan for a land purchase. However, compared with a land loan, a personal loan normally comes with a smaller dollar amount, a higher interest rate and a shorter payoff period.
What Is the Down Payment for a Land Loan?
The standard down payment for a land loan is 20%. While some lenders offer lower down payments for land loans, you typically need to pay a higher interest rate in return. Keep in mind that it’ll probably be tough to find a lender that’s willing to extend a land loan with a down payment less than 20% or with no down payment at all.
One of the advantages of a higher down payment on a land loan: You won’t need to come up with as much money for a down payment on the loan or loans needed to build and finance your home.