Land Home Loan

By: EconomyWatch Content   Date: 1 December 2009

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A land home loan enables a borrower to purchase a vacant lot or raw land for the purpose of constructing a residential home. Such loans may also be acquired for financing land purchases for minor commercial-housing undertakings. A land home loan is riskier than standard home loans as raw land values tend to fluctuate more than that of residential properties.

Land Home Loan: Considerations

To obtain the best land home loan interest, a borrower must review the following vital factors pertaining to the land:

  • Location: A land intended for residential use must ideally be located at a well established residential neighborhood. It should have proper access to necessary utilities like water and electricity. Also, the land should be easily accessible with proper connectivity through roadways.

  • Natural hazards: Lenders are hesitant to sanction land home loans when the residential lot is situated in a fault zone that is vulnerable to hazards like earth quake, flood and fire. A borrower may request for a ‘natural hazard disclosure’ from a local real estate or law firm to analyze the looming threats in the region before purchasing a land.

  • Soil quality: A land’s soil type is a vital factor to consider while purchasing a land. It adds to the construction expenses and the stability of the constructed home. Lenders hesitate to provide land home loans for lots that have granular and cohesive soil.

A land’s intended use also impacts the lender’s decision to sanction a land home loan application. Loans intended for purchasing a land for recreational use require greater persuasion by the borrower.

Land Home Loan: Alternatives

Due to the high level of risk inherent to a land home loan, lenders establish more rigid approval terms. Borrowers are generally required to have high financial strength or provide collateral to qualify for a land loan. Homeowners with moderate financial health or those hesitant to bear the risk of pledging collateral can consider the following alternatives to a land home loan:

  • Cash-out refinancing: This involves taking out a replacement mortgage on an existing home loan, wherein the new loan amount is greater than the current value of the home.

  • Home equity loan: This entails applying for a second mortgage on the basis of equity established on an existing home loan.

One can also consider home equity loans and cash-out refinancing as the interest paid on these two options are tax deductible.


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