You can use a lot loan to finance the purchase of land on which you intend to build your home. Down payments for lot loans are typically higher than those required for loans used to purchase existing family homes. Generally, interest rates are lower and down payment requirements higher for loans used to buy raw land as opposed to developed land.
Developed plots of land have access to sewage, water and are accessible via local roads. Most lenders write loans for developed lots, but you can only finance a lot with a personal loan if the lot has been legally designated as a residential lot, not a commercial lot. You can also finance the purchase of raw land which has no access to sewage, water or paved roads. However, lenders are more reluctant to finance loans on raw land since many plots of raw land are neither designated as commercial or residential and therefore the owner could use the land for any purpose.
Generally, lenders require people financing a lot to make a down payment of at least 30 percent. When you buy an existing home you only have to make a down payment of between 3.5 and 20 percent. Down payments on raw land often amount to 45 or 50 percent. However, lots are less expensive than finished homes so the upfront costs are not necessarily higher than those you pay to buy a finished home.
You can also finance your lot and your home construction with a construction to permanent loan. Typically, like lot loans, these loans require a 30 percent down payment, but you can use the proceeds to buy your lot and build your home, although some lenders only allow you to finance the construction of the home and not the actual land purchase. You borrow an amount equal to the cost of the finished home and receive the money incrementally to pay for the lot purchase and each stage of the home's construction.
You can take out a lot loan insured by the Federal Housing Administration if you intend to have a mobile home installed on your lot. You can borrow up to $23,226 with an FHA mobile home lot loan. You must hire professional contractors to permanently affix your home to the lot in compliance with FHA guidelines. You can install a used mobile home on your lot or purchase a newly constructed home.
- U.S. Department of Treasury: One- to Four-Family Residential Real Estate Lending; March 2007
- Bankrate: Land Loans: Don Taylor; Sept. 14, 2001
- Fannie Mae: Construction-to-Permanent Financing – Single-Closing Transactions; 2010
- U.S. Department of Housing and Urban Development: Financing Manufactured (Mobile) Homes