Using A Personal Loan To Buy Land: The Pros, Cons And The Process
Hanna Kielar7-Minute Read
Buying a plot of land can come with many possibilities. You could build a new house on that land, use it for your mobile home or almost anything else your heart desires. Land can be expensive, though, and you may need a loan to fund all or most of your purchase.
A personal loan is an option worth exploring when you’re buying land, and it even has a few benefits over using other types of land loans. Continue reading the article below to learn the process for buying land with a personal loan, as well as the pros and cons.
Can You Use A Personal Loan To Buy Land?
You can use a personal loan to pay for just about anything, and that can include buying land. Once you’re approved for a personal loan, the lender or credit union you’re borrowing from pays you a lump sum that you can then pay back over the length of the loan term.
How you plan to use your loan won’t affect your approval. What will factor into your financing is your credit score is and your debt-to-income ratio (DTI). Banks and credit unions may also offer more favorable terms to longtime customers and members.
Keep in mind, though, that if you’re planning to also build a home on the land you buy, you’ll be paying back your personal loan while trying to budget for the construction of your house. If you take out another loan to finance building the home, then you’ll be paying back multiple loans at once. If that sounds less than ideal, this approach to financing land might not be right for you.
Can You Use Personal Loans For Buying Property?
A major difference between personal loans and mortgages is that you can borrow much more money with a mortgage loan. A typical personal loan can let you borrow as much as $45,000. If you’re eyeing a smaller home, like a manufactured home, then you could consider paying for it with a personal loan. For more traditional homes and property, we recommend going with a mortgage.
How To Buy Land With A Personal Loan
Getting a personal loan is a relatively straightforward process.
You should always compare rates and terms between different lenders before taking on a loan, so you’ll want to first get preapproved with a soft credit check. Once you’ve found an offer that works for you, submit an application and wait to see if you’re approved. If your application is approved, you should receive your funds within a week or less. Rocket Loans® offers same-day funding, meaning you could potentially get your money the same day that you apply.*
Getting approved depends largely on your credit score. For a personal loan with good rates and terms, you’ll want a score of 650 or higher. Having a low DTI will also boost your chances of getting approved.
Once you have your funds, all that’s left is to make your offer to the landowner. According to a 2020 summary by the USDA National Agricultural Statistics Service, the average cost of land per acre is $3,160. Depending on how much land you plan to buy and how much you’re able to borrow, you can use your loan to pay for all or much of your purchase.
Pros And Cons Of Using A Personal Loan For Land
Using a personal loan to buy land has some benefits over other means of land purchase, but the process has its drawbacks as well. Let’s break down the pros and cons of using personal loans for land.
- Unsecured loans: Personal loans are typically unsecured loans, meaning you won’t have to put up any collateral in order to secure the loan. Otherwise, you could stand to lose the asset you use for collateral if you default on the loan.
- Fewer fees: While more traditional loans tend to come with multiple extra fees – appraisals, processing and underwriting, for example – personal loans often charge only an origination fee. You could be saving money by using a personal loan for land, especially if you can qualify for lower annual percentage rates (APR).
- Shorter terms: The term for a personal loan is typically 12 – 60 months, shorter than many more traditional types of loans. If you don’t want to be paying off a loan for years and years, a personal loan might be the right choice for you.
- Fast funding: As mentioned above, personal loans have a faster turnaround time than many other loans, which can be beneficial if you need your money fast.
- Lower loan amounts: As discussed above, personal loans can only lend out so much, and generally no more than $45,000. If you divide that by the average price of land – $3,160 per acre – that could buy you around 14 acres. If you’re looking to purchase a bigger plot of land, a personal loan may not be your best option.
- Higher credit score required: In order to get decent rates and terms, a borrower will need a credit score of 650 or higher. For people with lower credit scores, a personal loan wouldn’t be very accessible, and could come with unfavorable terms even if approved. Building your credit can open up more loan options for you to buy land.
- Higher interest rates: Because a personal loan is usually unsecured, the interest rates may be a little higher than with other loans. You can qualify for a good interest rate and APR with a higher credit score, as your creditworthiness can assure a lender that you’re good for repaying the loan.
Alternatives To Buying Land With A Personal Loan
If a personal loan doesn’t sound like your best option for buying land, there are a few other means through which you can finance your land purchase. Let’s take a look at those.
A land loan can be acquired through a bank or credit union to buy a plot of land. In order to qualify for a loan, the borrower must prove they have an excellent credit score and explain to their potential lender how they intend to use the land. Factors like zoning, property lines and access to utilities can inform a lender how risky a loan might be for them and may influence the loan’s rates and terms. A land loan will also require a down payment, the amount of which may depend on what type of land you intend to buy.
There are three main types of land loans:
- Raw land loans: “Raw land” is defined as completely undeveloped land, with no utilities or even roads. Having a detailed plan of how you’ll use the land can help convince a lender to finance this type of land purchase. A raw land loan will usually require a large down payment because of the risk it poses to the lender.
- Unimproved land loans: “Unimproved land” is a little more developed than raw land since it usually includes some utilities and amenities, but you would still want to give your potential lender a detailed plan of your intentions. The required down payment for an unimproved land loan is lower than a raw land loan, but still higher than many types of financing.
- Improved land loans: “Improved land” has access to utilities, roads and water, and so it may be more expensive to buy than raw or unimproved land. Because improved land has some known value attached to it, interest rates and down payments tend to be lower when getting a loan.
A construction loan, as its name implies, can cover the construction of a house on a plot of land, after which the borrower applies for a mortgage on that house. With a construction loan, the buyer’s primary intention is to build a house on top of the land, so the loan may feel like less of a risk for a lender. This could also lead to a lower down payment and interest rates.
The U.S. Department of Agriculture (USDA) offers two short-term loans for buying land, known as Section 523 and Section 524 loans. Both loans offer low interest rates, and the 523 loan stipulates that the borrower is responsible for providing their own labor for their construction project, while the 524 loan doesn’t state any limits on methods of construction.
Home Equity Loans
Similar to a personal loan, a home equity loan can provide you with a lump sum that you can spend however you wish. The caveat here is that your loan is secured by the equity in your home, so if you default on the loan, your lender could take possession of your home through the foreclosure process.
HELOC stands for home equity line of credit. Like home equity loans, HELOCs are secured by your home’s equity. A HELOC provides a borrower with a revolving line of credit that they can borrow from and pay back. As with a home equity loan, your home is at risk of foreclosure if you fail to repay what you borrow.
Sometimes the owner of the land being sold will be willing to lend directly to the buyer. A common repayment term for a seller financing loan can be 5 – 10 years, and you won’t have to pay the closing costs you would with a traditional lender. A large down payment is typically required, but nearly every other aspect of the loan and transaction is negotiable. One drawback to this method is that you only have the word of the seller when it comes to the value and condition of the land. It could be beneficial to pay for research on the land’s title and boundaries, just to be on the safe side.
Buying land can offer a lot of opportunities, and a good loan can get you started. If you want to qualify for the best land loan, your most important assets will be an excellent credit score and a plan for what you want to do with the land you’re buying.
*Same Day Funding available for clients completing the loan process and signing the Promissory Note by 1:00PM ET on a business day. Also note, the ACH credit will be submitted to your bank the same business day. This may result in same day funding, but results may vary and your bank may have rules that limit our ability to credit your account. We are not responsible for delays which may occur due to incorrect routing numbers, incorrect account numbers, or errors of your financial institution.
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