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Personal FinanceHow to get a land Loan in Texas

How to get a land Loan in Texas

Introduction

Land loans aren’t your typical home mortgage and getting one is much more difficult.

The first thing you need to know about land loans before you do anything else is what they are and how they’re different from a mortgage.

 A standard mortgage is a loan that helps you purchase a home.

A land loan, on the other hand helps you buy a piece of land so that you can build on it.

In this article, we’re going to cover the difficulties of land loans and types of land and how and where to get a land loan.

Why is obtaining a land loan more difficult in Texas.

Land loans can be trickier in Texas to qualify for. This is because it’s harder for a lender to resell a piece of land than a fully constructed house. So down payments and interest rates are usually higher for land loans than they are for mortgages. So while undeveloped land is generally cheaper than developed land, it’s important to know that financing it can sometimes be a challenge. The upside, of course, is that building your own home or office from the ground up can be really rewarding. Taking this route lets you customize every single detail.

Types of land in Texas.

The first and typically cheapest land to purchase is

Raw land. 

This is undeveloped land. There’s nothing on it, no water, power, sewage, or road, and though it could be cheap it’s worth considering that it could actually cost you more in the long run. From a lender’s perspective, developing raw land is the most challenging, and thus the riskiest, kind of building project.

To get the best terms for a loan to develop raw land, you’ll need to have a strong credit history and a detailed, comprehensive, and thoughtful building plan.

Unimproved land

This property also lacks basic amenities, but represents a step up from raw land. It might have a road, for example, but no water and no power.

Improved land. 

This is a piece of property that is ready or nearly ready to be developed. It’s in the process of becoming construction ready and might have drainage, paving, or other utilities. It follows that it is the most expensive type of land.

Places to get a land loan in Texas.

First, the more conventional route to take would be to get a land loan from a lending institution.

But here’s an insider tip. You can probably have better luck with a smaller bank or credit union than a big national bank. For land upon which you will build an office or commercial facility, you can apply for a loan from the U.S. Small Business Administration. The first in this category is

  1. A 504 loan.  This provides fixed rate financing of up to 5 million for facilities that promote business and create jobs for the United States citizens.  You’ll have to pay a down payment of 10% if you obtain this loan. You can check the Small Business Administration’s website  to see if you’re eligible.

Requirements for obtaining a small business loan in the USA

1.  Operating as a for-profit company in the United States with a net worth of less than 15 million and getting an average net income of less than 5 million after taxes for two years before you apply.

2.  7a loan.

This offers for up to 5 million and is the most common loan program in Texas. Eligibility depends on the nature of your business activity, your credit history, and the location of your business. Obtaining a VA loan is also possible for land. If you’ve served in the military and qualify for a VA loan, you can use it to purchase land. One has to just make sure that the land he is interested in meets the criteria set out for this loan. For example the land must have street and backyard access as well as a safe water supply and sewage system.

If you’re low or moderate income and looking to build in a rural area, you can apply for a loan from the United States Department of Agriculture.

The program began as a way to provide financing for farmers who could not qualify for a loan but has since expanded to include all rural residences.

The first type of loan in this category is known as

A Section 523 loan

This goes to private or public organizations looking to provide subdivided lots for people who plan to build their own homes.

A Section 524 loan.

 This is available to organizations intending to develop a property in order to provide housing to low or moderate income families. The interest rate for these is below the market and updated monthly. Both section 523 and section 524 loans have to be paid within two years. If you already own a home you can take out a home equity loan for a piece of land. This basically means you’re securing the loan with your house.

Conclusion.

You don’t have to make a down payment but you do take on the risk of losing your home. If you’re set on designing your home from the ground up but you can’t find a land loan option that works for you, another option is to take out a mortgage for a property. Perhaps a tear down on a piece of land that you wish to purchase.

Then tear the structure on the land down and rebuild it yourself. This does have the potential to be more expensive. And lastly you’ll find some settlers that will do an owner-carry arrangement whereby with a down payment you can pay installments directly to the owner until the purchase price is fulfilled. Before you choose a financing option, make sure you have a building plan for the land you’re looking to purchase. You’ll need to show that you’ve thought through your plan and if you’re not planning to build your building yourself that you’ve hired builders to do the work for you.

Lenders want to be sure that you’ll be able to complete your construction project. A strong building plan and a good credit history are essential if you want to qualify for a land loan with favorable terms.  Read more here on VA Housing Loan Certificate of Eligibility.

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