Buying Land Before Building: How Lot Loans Work in Southwest Ohio

Purchasing a parcel or more of land prior to initiating the construction of a home offers a high level and completely unmatched of flexibility for custom builds. You will find that you have an exceptional level of control. The main areas of control would be the location, the exact design, as well as the timing. It does not matter if you want to purchase parcels in Hamilton County, Clermont County, or Montgomery County, financing the land that you want to purchase will nearly always require you to indulge in a specialized product known as a “land loan” or a “lot loan”.

What are Lot Loans?

Lot loans – often identified as “land loans” – is a type of loan that aids in the financing of a parcel that is underdeveloped, partially improved, and/or vacant. It does not possess the requirement of being immediately built upon. Most lenders look at land as a “high-risk” collateral. That is because it generates absolutely no income and has a low appeal in terms of resale. This is especially true when compared to real estate that has been improved. These types of loans usually have shorter terms that range from as little as 2 years to as many as 15 years. These loans will have higher interest rates than, say, a standard mortgage, and may even include a balloon payment at the end.

How are Lot Loans Different Than Standard Mortgages?

Lot loans are different from standard mortgages in many ways. These are outlined below:

• The Terms of the Loan – As previously mentioned, lot loans typically have shorter terms than that of traditional mortgages. They are usually set at 2 to 5 years, but may go up as far as 15 years and most have a balloon payment that will be due at the end of the loan.
• The Down Payment- The percentage of the down payment is much different. For raw, undeveloped land, the down payment is usually 35%. For land that is considered to be “unimproved”, the down payment usually comes in at about 25%. If the land is improved and includes utilities and access by road, the down payment is usually about 15%. Most standard mortgages require a minimum of a 10% down payment.
• The Interest Rates – On lot loans, the interest rate is definitely going to be higher than traditional mortgages because of the higher risk involved.
• The Repayment – In the beginning of a land loan, it is likely that the payments may be amortizing or interest-only. At the time of maturity, there will likely be a large balloon payment that will need to be made.
• Credit – When you need a lot loan, your credit profile should be strong. At the minimum, your credit score should be a minimum of 680 and – at times – 700+.
• The Purpose – The reason for most lot loans is for holding land until the owner is ready to build.

Qualification Requirements for Southwest Ohio Land Loans

The underwriting for land loans is very similar to traditional mortgage loans; however, they have a high level of risk, which means they also have a stricter threshold. The following outlines the most basic qualification requirements for a lot loan:

• At the minimum, there is a set credit score that is put into place. In most cases, a score of 680 and up is preferred. Credit scores of this level usually have the best rates. Lenders that have a portfolio or an owner that is interested in financing many accept credit scores of 580 or higher. It all depends on several factors.
• The down payment required is typically 20% or higher. If the loan is for raw land, it will usually require a higher down payment.
• The next thing that is reviewed is the debt-to-income (DTI) ratio. These are usually 30 to 44% – max.
• Your income and assets will be reviewed. You will need to have a stable employment history and/or income. Your income and employment will need to be verified. You will also be expected to have financial reserves for payments and the potential balloon payment that you may have to pay in the end.
• The next qualification is a property appraisal. This will only be for the actual land and not on any old structure that may be on the property.
• Typically, no homeowner’s insurance is required.

Once all qualifications are met, a lender will evaluate the location of the land, engage in the zoning process, determine the potential of buildability, and come to a conclusion on the resale value. Lots that have been improved, which means that they have utilities and may be accessed by a road, are much easier to finance than raw land.

The Pros and Cons of a Lot Loan

If you have an interest in obtaining a lot loan, it is advised that you work with a community bank or a local credit union instead of a national lender. National lenders usually do not care to providing financing for land parcels only. When looking for land, you should consider getting preapproved. Below, you will discover the pros and cons of lot loans:

The Pros:

• You will be able to lock in the land that you want before the price of it increases or before it is no longer available.
• By obtaining a lot loan, you can build on the land on your timeline. In fact, many lenders allow you to hold the property for many years.
• You can build equity on the parcel while planning what else you want to do with the land.
• You may be able to engage in a single closing when you combine it with financing for construction. This will help you save on the overall costs.
• You may be able to actually customize the home that you want to build without making any compromises.

The Cons:

• You will find that the down payment and the interest rates are much higher.
• The terms of the loan will be shorter and it is most likely that you will be required to pay a balloon payment. If you cannot refinance or pay off the loan, default is likely.
• If you have a piece of land that is vacant, you will discover that it is very difficult to sell in a fast manner.
• Once you get the land, you may find that it cannot be built upon due to zooming issues, soil problems, septic issues, or problems associated with utilities.
• There are far fewer lenders and options due to the required due diligence.

In the suburbs that are now popping up in and around Southwest Ohio, a higher level of flexibility outweighs the cons of obtaining land with a lot loan. This is especially true for those that are seeking to build a custom home nears areas that offer amenities and places where there are many employment opportunities.

What Due Diligence is Required Prior to Purchasing a Parcel?

If you want to purchase a parcel or more of land in Southwest Ohio, it is essential that you do your due diligence. By conducting a thorough investigation, you can prevent yourself from making a very costly mistake. The following steps should be followed:

1. First, you should make contact with the planning department in the area where the land is located to see if there are any zoning and building permits required. If so, look into minimum lot sizes, permitted structures, and residential zoning.
2. Research local resources. These could include recorder offices and/or the county auditor office, the Environmental Protection Agency, and even the health department to see if there are any records associated with the land and/or any guidance issued on the lot.
3. You should research the land to see if it is in a zone where flooding occurs. You should also have the drainage evaluated.
4. Next, look into the survey, the title, and the easements requirements. It is very important to have a professional boundary survey done and if the land is in a subdivision, what the Homeowneer’s Association requirements are.
5. Finally, review the market input and the builder input on the area. This is where recent sales of land in the area will be compared, and a builder will be able to provide the feasibility of building on the lot and provide you with a cost estimate on the land.

Basic Tips for Buyers

If you want to purchase land in Southwest Ohio, it is important that you gather a team of professionals to assist you. This would include a land realtor, mortgage lender, an attorney that specializes in real estate, a surveyor, a bank, and a builder. Consult any other professional that you may need – such as tax advisors, and others.

Contact Us

We here at Somerville Bank are standing by to assist you with lot loans, mortgages, and more. Southwest Ohio provides you with the space to create a custom home and numerous opportunities for your family. We can help you in the transition from initial lot purchase to construction, and beyond! Contact us today at one of our many locations: https://somervillebank.net/locations/