Land Loan and Mortgage Terms and Restrictions
To understand the terms and restrictions of land loans and mortgages, you should understand the differences in the two. Research every lender’s terms and restrictions. Be sure you know what you are agreeing to when you sign the final papers. There are many differences in lender and state policies. Get to know your state requirements and those of your lender.
Features of a land loan:
A land loan carries more risk than a mortgage. It is very easy for the borrower to stop paying the loan and leave the lender with a piece of property to unload. Interest rates and down payments are higher. These loans can either be secured or unsecured.
There are land loans for unimproved land and improved land. Some rules terms and restrictions are tailored to these two types. There are higher down payments and interest rates with unimproved land loans. Lenders are also choosy when it comes to unimproved land loans. The location and utility availability are points that lenders look at. Look closely at the down payment required. Some lenders require 50% down to finance this type of land loan.
A loan for improved property is much easier to qualify for. Buying land that does not need additions or improvements to be used as intended. The loan is typically paid off when the borrower gets a mortgage.
Land loans are similar to home equity loans in time span. A typical land loan will mature in 10 – 15 years. The interest on these loans may or may not be deductible. Check with a tax expert to see if your land loan will qualify for a deduction.
A mortgage uses real or personal property as security for a debt. The owner gets conditional ownership. If you default on a mortgage, you no longer own your home, the lender does.
A 20% down payment is usually required, but some lenders will work with you. There are more options than there are with a land loan. A mortgage has a longer life than a land loan. A mortgage is a standard loan for individuals and businesses to purchase residential and commercial real estate without having to have the entire amount up front. A borrower can hold a mortgage for up to 40 years.
Interest rates vary. The lender may offer several types. Fixed rates that do not decrease or increase. Adjustable rates that adjust on a set schedule, either up or down. These terms vary greatly by lender and state.
New news on lending
As the government is trying to regulate and stop bad lending practices, new terms and restrictions are coming into the real estate market. Lenders are not required to give a borrower an estimate of the cost of the mortgage. Lenders must do this within at least 72 hours. Prepayment penalties are now limited.
A good credit rating is more important now. In the past, a borrower with an average credit rating could still get a mortgage with a low interest rate. Now the credit requirements are increased. The lower your credit rating is, the higher your interest rate.
Every lender will have different terms and restrictions. Shopping around for the best deal is a must. In today's housing market, borrowers need to work on getting the loan approval and then work on terms and restrictions. Check the lenders requirements if you do not meet them, check another. Don't apply for a loan that you cannot meet all the requirements for.