Tennessee has boundless options for selecting the right piece of land to build a home or business on, whether you want to move to the flat fertile plains near the Mississippi River or in the wild, rocky Blue Ridge Mountains. If you are interested in buying land in Tennessee or any other state, your best option for financing is a land loan through your local lender.
Land loans will give you the funding you need to secure the land you want to purchase in Tennessee, but there are a few steps and requirements you will need to know before applying for one.
What is a Land Loan?
To buy a lot or piece of vacant land, you will need to get a land loan in Tennessee, or as it’s sometimes referred to, a lot loan. Land loans are like mortgages for land; they are used to finance the purchase of vacant land.
They can often be confused with construction loans, which are used specifically for people who are going to be building a house quickly. In contrast, land loans are for the purchase of land that you don’t intend to build on right away. For example, you may want to finalize building plans for your business or home, or you simply want to own a bit of land for investment purposes.
Developers tend to purchase land using land loans as larger projects that will take years to complete, instead of a single house that may be more suitable for a construction loan.
Types of Land Loans You Can Apply for in Tennessee
The options for getting a land loan can vary by what the land is being used for and where you are buying it.
Raw land loan
If you are new to land loans, this may be the type of land you are thinking of when it comes to purchasing land. Raw land is land that has no utilities or access to them and may not have a road leading to it. The lot is simply just the land or area.
Getting approval for a raw land loan can sometimes be difficult because there is more risk in building with this type of loan. You will need to provide a detailed plan for it along with surveys and have a good financial history. Due to the higher risk, raw land loans tend to carry higher interest rates and stricter requirements like excellent credit scores or a large down payment.
Unimproved land loan
Unimproved land is slightly more developed than raw land. The land or area could have some utilities connected to it, such as electricity, and have a road to it, but it may not have all the necessary utilities to build on. If you are building a house, for example, you will likely need to put in a well for water and a septic tank for sewage.
Lenders see unimproved land as less of a risk than raw land because it already has access to utilities, so the requirements aren’t necessarily as strict. As with all loans, though, it’s better to be in good financial standing before applying for these types of loans.
Improved land loan
Improved land means that all the utilities are available on the lot, and there is access to amenities, including roads. You might find improved land lots closer to cities and towns which make them more appealing to purchase but are oftentimes more expensive.
As they are less risky than the other types of land loans, improved land loans may come with a lower interest rate and smaller down payments but can still be overall more expensive due to proximity and amenities.
How to Get a Land Loan in Tennessee
Getting a land loan is similar to getting any other type of loan, like a house mortgage, where you would apply for a loan, and the lender will look over your qualifications to approve you.
The general requirements for getting a land loan in Tennessee are as followed, although each lender will have their own specific application:
- Minimum credit score of at least mid-to-upper 600s to lower 700s. The higher the credit score the better, especially if you are applying for a raw land loan.
- Down payment of up to 50% of the loan.
- Debt-to-income ratio of 43% or less.
With a land loan, there is a greater risk to the lender since there is no property collateral, so they must determine what the land is worth, usually with a land survey and zoning restrictions. The lender will also usually require you to provide documentation on the boundaries of the land, access to utilities, and your plans for the land, such as what type of business or home you intend to build on it.
Pros and Cons to a Land Loan in Tennessee
Choosing whether or not you want to apply for a land loan can be a big decision. Land loans, like all loans, come with both pros and cons, aside from just obtaining the land you want to buy.
Pros to land loans
- Land loans can be inexpensive compared to other types of loans, depending on the type of land and location you are interested in buying.
- Unlike construction loans, land loans give you the option to build over time. You don’t need to rush the building process and instead focus on taking your time.
- With a land loan, you are able to build what you would like on the land within zoning restrictions.
Cons to land loans
- Although land loans can be less expensive than other loans, like personal loans, they do come with high-interest rates because there is more risk involved. They also tend to have large down payment requirements, often half of the loan amount.
- The higher risk makes land loans harder to get than other types of loans. Lenders want to see healthy, consistent financial history with high credit scores. If you have a lower credit score or don’t have the whole down payment, a land loan may not be for you.
- You are responsible for paying back the loan, even if your construction project hits a wall or is not prosperous.
How to Choose Your Land Site for Your Land Loan in Tennessee
Once you have decided that a land loan is the right type of loan for your home or business, it’s important to select the right land site. Tennessee is a state with many geographic regions and bustling cities, and knowing what you want to use the land for is just one step of finding the right site.
Before picking the cheapest land that you see, consider the following:
What is the zoning law? Are you planning on building your first home, or are you a developer looking to build a suite of offices? Understanding the zone your land is in and potential zoning changes in the future is essential to picking the right land site. Also, be sure to check the noise, fire, and flood zones that your land is in. Although it may be dry in the summer, winter rains could cause future damage and delays.
What are the boundaries? When you’re buying an already built home, it’s usually easier to know where the boundaries are, but when you are buying undeveloped land, it can be harder to tell. Before investing in property, have a land survey conducted, so you know exactly what you will be buying.
What easements are on the land? Some townships or utility companies may be able to use part of your land without your permission; be sure to check who the title is currently in to ensure you will be getting full ownership of the property.
Other Loan Options to Purchase Land in Tennessee
Land loans can be the best option when you are looking to purchase a lot of land in Tennessee, but there are a few alternatives if you are reluctant to go with a land loan. Some other loan options for buying land in Tennessee are:
An unconventional way to buy land is through seller financing. Seller financing, or land contracts, are real estate agreements between the buyer and seller where the seller acts as the lender and handles the mortgage. The buyer still signs a contract but with the seller directly rather than through a lender.
Seller financing is optimal for those looking for a flexible way to buy land and can be easier to qualify for compared to traditional land loans. However, when buying land through seller financing, the legal title remains with the seller of the land until you pay the loan off. They also can change the interest rates at will if the contract is not clear.
Home equity loan
If you have a mortgage already, you may be able to qualify for a home equity loan that acts as a second mortgage and allows you to tap into the equity on your house. Home equity loans are great if you have equity built into your home, and they tend to have little or no down payment required. You also have the ability to get a lower interest rate than you would with a land loan as the home acts as collateral for the loan. Of course, if you do default on the loan, you could lose your house.
Although not a complete substitute for a land loan, a construction loan can be a good alternative if you are looking to build sooner rather than later. Construction loans are short-term, usually, about a year, have higher interest rates than a home equity loan, and require a down payment. However, if you have found land that you want to build on and have a plan ready, a construction loan can serve as the financial fuel.
Is a Tennessee Land Loan Right for You?
Getting a land loan in Tennessee can have both benefits and drawbacks to it, depending on what type of loan you are looking for and when you are looking to build. A land loan will ultimately help you get the funds you need to build on a vacant lot, which can accrue equity over time once you have built on it. With a land loan, there is no rush to build either; you can work as fast or as slow as you want to ensure your building is constructed the way you want.
When applying for a land loan in Tennessee, be sure to do your homework. You will need to assess the land and amenities that it comes with, as well as have a plan for what you intend to build. The more details and documents you provide, the better success you will have at getting approved for the loan. If you are interested in a land loan in Tennessee or want to look at other financing options available to you, our team at SouthEast Bank can help get you started.
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