Photo credit: Television Tropes & Idioms
If you are considering to build a home, you may need to use a lot or land loan to purchase the dirt. Do you know how they are different from a home loan? How are the different from each other?
Lot loans vs land loans
A lot loan is for a piece of land that is finished and pretty much ready to build a house on it. On the other hand, a land loan is for a piece of land that is vacant, undeveloped, and needs some work before you can put anything on top.
Some banks do not offer loans for lot/land, which means less options for borrowers, which means less room for negotiation. Also, lenders have different thresholds to decide if a piece of dirt is a land or a lot. And yes, they do treat them differently.
LTV and loan length
When you borrow money from a bank, the amount of your down payment depends on LTV, or loan-to-value ratio.
Loan-to-value ratio = (loan amount) ÷ (property’s value or its purchase price, if lower)
More LTV means less down payment. A borrower who is purchasing a house can see LTVs as high as 100%, which means there’s no down payment. A borrower for a lot or a land usually gets lower LTV, which means more down payment. A borrower for a lot can usually get high LTVs than land.
In terms of the length of the loan, land and lot loans are usually short term. A standard length of a house loan is 30 years, but this is not available for lands/lots. Their “... choices may be limited with a land or lot loan to being amortized over 10 to 15 years” (LotNetwork.com).
Some other differences include higher interest rate and more paper work for land/lot loans.
Rule of thumb... do some research before you buy! This doesn’t only apply to loans but to pretty much anything you buy. It’s so important for you to know your options, their differences, and which one is the most fitting for you. Being educated about your options can help you save money!