Understanding The Different Types of Land Loans
Purchasing a plot of property (with nothing on it) may seem like a simple transaction, but the process can be more complicated than investing in a house or building that comes with earth that surrounds it.
If you are interested in buying a piece of land to use for business purposes, including building an office or facility, you will need likely a land loan.
What is a Land Loan?
Land loans in Maryland offer credit to qualified borrowers that can be used to purchase pieces of land. Because they aren’t as common as mortgage loans and often are riskier, these loans typically require larger down payments and have higher interest rates. Therefore, it’s important to consider all the different types to make sure you are getting the most affordable and beneficial option for your business.
Types of Land Loans
There are a few different common types of land loans in Maryland, all with different pros and cons. The option you pick will depend on what you will use the land for—residential building, commercial building, farming, etc.—and also the size and location of the plot. Read on to find out which one can help you best meet your goals.
Note that terms and rates below are based on averages and will vary.
Lender Loans
These traditional loans come from banks or credit unions. Try small or local banks first, as they often finance more land loans than large financial institutions. The borrower will need to present a loan package with specs and plans for the land, as well as personal financial information to determine their credit.
If you don’t plan to develop the land, interest rates could increase.
Rates: 4.3–6%
Terms: 7–30 years
Where to Find: Think local. Seek out banks in your community because they will have the most knowledge about the land being considered.
SBA 504 Loans
An SBA 504 loan is financed through a Certified Development Company (CDC) and can be used to purchase land intended for commercial development. The loan will have three sources of funding. A commercial, third-party lender holds the first mortgage position and typically offers up to 50 percent of the project cost. The SBA 504 loan-backed portion from a CDC will act as a second mortgage, financing up to 40 percent of eligible project costs. The remaining 10 percent (an equity investment) will be your small business owner contribution.
Rates: 2.4–2.8%
Terms: 10–20 years
Where to Find: These loans are offered through a local Certified Development Company (CDC) that partners with third-party lender.
Home Equity Loans
A buyer with existing property and little debt may be eligible for a home equity loan, which uses the equity of the existing property and typically offers much better terms than any regular construction or land loan.
This loan can be an attractive option, but it’s also risky. If you default, you are in jeopardy of losing your home.
Rates: 3.5–9%
Terms: 10 years
Where to Find: Most every bank or credit union.
Seller Financing
In this case, the borrower negotiates directly with the owner of the land. Since there is significant financial risk involved, borrowers should expect steeper interest rates, larger down payments and shorter repayment terms.
However, since the transaction takes place between private parties, everything is negotiable.
Rates: Usually 6% or more
Terms: 5–30 years
Where to Find: A willing seller. It doesn’t hurt to ask.
