Purchasing a piece of land offers an abundance of possibilities. You can build a new home, use it as a location for a mobile home, start a business, and much more. However, land does not come cheap and you may require a loan to fund the majority of the purchase.

Personal loans are something worth considering if you have plans to buy land. There are some benefits to using a personal instead of a specific land loan. If you want to know more about how to finance a land purchase with a personal loan, then continue reading.

 

 

Personal loans can be used for almost anything and this includes buying land. When you get approved for a loan, the loan provider or credit union gives you a lump sum that you need to repay over the term of the loan. The purpose of the loan does not affect whether you get approved or not. What does matter are your credit score and debt to income ratio. Credit unions and banks may offer better terms to their members and longtime clients as well.

Take note that if you plan to use the land as the site for your new home, you have to budget for repaying the personal loan and the construction of the house. Taking out a new loan for the building of the house means you need to repay several loans simultaneously. If this does not sound ideal, then this method of financing may not be suited for you.

The main difference between a personal loan and a mortgage is that you can borrow bigger amounts with mortgage loans. Personal loans typically have a limit of $45,000 for the amount you can borrow. If you’re interested in a smaller home or a manufactured home, then you might be able to use a personal loan to finance the purchase. For traditional properties, it is recommended to apply for a mortgage loan instead.

The application process for personal loans is not complicated. Before you sign on the dotted line, make sure to compare terms and rates between different providers and get prequalified through a soft credit check. When you receive an offer that fits your financial means, you can submit an application and wait for the approval. If the application gets approved, you can expect to receive the funds in a week. Some loan companies even provide funding within the same day or the next business day.

Personal loans depend on credit scores. You want a score of at least 650 if you want to receive fair rates and terms. A low DTI will also improve the chances of getting your loan approved. Once you receive the funds, you can send an offer to purchase the piece of land. The USDA National Agricultural Statistics Service estimated that the average cost of land per acre in 2020 was $3,160. Depending on the size you want and the loan amount you received, you can use the personal loan to pay for all or a certain portion of the purchase.

Using your personal loan instead of other financing options to purchase land has its advantages and disadvantages. We break down the points for each to help you decide.

Pros

Fewer fees: Traditional loan options for land purchases usually come with several extra fees for appraisal, processing, underwriting, and more. Personal loan providers only charge origination fees usually. If the Personal loan can cover the cost of the land, you can save money especially if you receive lower annual percentage rates.

Unsecured loans: Personal loans are usually unsecured so you won’t need to offer any property as collateral to get approved. Taking out a secured loan for your purchase means risking a property you already have if ever you fail to make payments.

Fast funding: Personal loans have a fast turnaround time which is advantageous if you need access to funds immediately.

Shorter terms: Personal loan terms are usually 12 to 60 months which is shorter than other loan types. If you don’t want to spend several years paying off your loan, a personal loan is a great option.

Cons

High credit score requirement: If you want to get better offers for rates and terms, you need to have a credit score not lower than 650. People with lower credit scores might find it more difficult to access personal loans that are better than mortgages. Poor credit often means you get the less favorable terms even if your application gets approved. Improving your credit before taking out a loan can help you access better options to purchase land.

Lower loan amount limits: as mentioned before, personal loans are usually smaller than mortgages. The average limit is around $45,000. If you divide the loan amount by the average price per acre, you’ll get approximately 14 acres of land. If you’re eyeing a bigger size, a personal loan is not your best choice.

Higher interest rate: Since these loans are unsecured, expect to have higher interest rates compared to other loans. A high credit score really does the work in getting you better rates and APRs.

If the cons outweigh the benefits of using a personal loan, you still have alternative options to finance your purchase.

You can apply for a land loan through your bank or a credit union to purchase land. Qualification requirements include having an excellent credit score and disclosing the purpose or use of the land. Factors such as property lines, zoning, utility access, and more determine the risk of the loan and may affect the terms and rates offered. Land loans also need a down payment, which will be based on the type of land you want to buy.

Land loans can be differentiated according to three main types:

• Raw land loan – This refers to land that is completely undeveloped, without roads or utilities nearby. Providing a detailed plan of how the land will be used will help you convince the loan provider to approve your application. Raw law loans also require huge down payment because they pose a higher risk to the lender.

• Unimproved land loan – This refers to land that is “more developed” than raw land and there is access to amenities and utilities. As a borrower, it is still a good idea to provide the lender with your plan for the land. Compared to a raw land loan, the down payment for unimproved land loans is lower.

• Improved land loan – This type of land loan is for land that has access to roads, water, and utilities which means the price of land is higher compared to raw or unimproved land. Improved land already has known value so you’ll get lower interest rates and down payment requirements.

Constructions loans cover the construction of a building or house on a piece of land. The borrower then applies for a mortgage on the house. A borrower’s main goal with a construction loan is to build the house on the land they purchased so the lender may feel a lower risk.

A home equity loan is similar to a personal loan since the borrower also receives the lump sum amount of the loan. The difference is the loan is borrowed against the equity of your home. If you default or fail to make payments, the loan provider can foreclose your home.

There are two short-term loans offered by the US Department of Agriculture – Section 523 and 524 loans. Both loans offer low interest rates. Section 523 loan stipulates that it is the responsibility of the borrower to provide labor for the construction project. Section 524 loan does not mention any limitations on the construction methods.

Some landowners would be willing to lend to their buyers directly. For a seller financing loan, the common repayment terms are 5 to 10 years. You would not have to worry about closing costs that would be required with traditional lenders. Usually, you have to provide a large down payment but you can negotiate almost every aspect of your loan.

One downside to this financing option is that you only take the word of the landowner regarding the value of the land. It would be a good idea to commission a professional to research the title and boundaries of the land for additional safety.

A home equity line of credit, just like home equity loans, secures loans against a home’s equity. Borrowers get access to a revolving credit line they can borrow and repay. The risk of foreclosure is present if you default on payments.

Buying a plot of land can open up a lot of possibilities and finding a loan with fair rates and terms can get you closer to these opportunities. If you want the best offers, the most important determining factors are your credit score and your plans in using the land you’re interested in.