Unimproved land, or raw land, with no plans for improvement is the hardest type of property to secure a loan on because it is in essence a speculative investment. Raw land has no added improvements like sewers, utilities, streets or structures.
A raw land loan will have higher down payment requirements and a higher interest rate than an improved property loan. Some lenders require a 50 percent down payment, but you should be able to find a lender that will only require a 20 or 25% percent down payment. A local lender that is familiar with the property will be more willing to work with you on the loan than a lender unfamiliar with the area.
When purchasing the property, insist on a warranty deed and title insurance to make sure you'll have clear title to the property.
Improved property, zoned for your intended use, will be easier to get a loan for than unimproved property. Buying land with immediate plans for construction is the easiest type of land loan to secure because the lender will be paid off when you get a mortgage on the structure.
Construction Loans
Construction loans are story loans. That means that the lender has to know the story behind the planned construction before they're willing to loan you money. Because it's a story loan, it's not going to be standardized like mortgage loans underwritten to Freddie Mac or Fannie Mae guidelines. There are some common features to a construction loan. Construction loans typically require interest-only payments during construction and become due upon completion. Completion for homeowners means that the house has its certificate of occupancy.
A construction loan finances the land, land improvements (such as clearing, grading, utilities, driveway, etc.), actual construction costs, finishes in the home (such as carpeting, appliances, etc.), architects and engineer's fees, permit fees, interest payments on the construction loan while the home is under construction (so you don't have to make payments on your present home plus the home under construction if you do not wish to) and closing costs on the transaction.
A construction perm loan is a loan performed at the end of the construction phase that refinances the 'construction' loan to a common mortgage. Typically a construction loan is 'interest only' for the build period and most 'construction' lenders require that their 'construction' loan be paid off at home completion. The major drawback to this scenario is that the homeowner has to incur an additional set of closing costs when they are required refinance the construction loan. The good side is that you have the option and time to find a very good final mortgage.
As an alternative, there is what is known as a 'one-time-close' construction loan. This type of loan finances the construction period and has a loan program (30 year fixed, 3/1 ARM, etc...) already in place for when the loan 'converts'. The 'pro' is that you only have to pay closing costs once. The 'con' for these types is that you must lock in the final rate prior to closing. Many lenders offer a 'floatdown' (when rates drop during the construction period, they will reduce your rate), but that often has a fee associated with it.
Owner financing is always a good option to consider if the seller is willing to hold paper. Somtimes the terms may be more favorable to the buyer since interest rate & closing costs can be minimal with this type of loan.
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