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Lot Loans

For homebuyers who are looking to build their dream home, a lot loan helps them purchase the lot of land to build upon. A lot loan is notably different from a construction loan, which is used to cover the costs of construction, as opposed to the actual land being built upon.

Benefits of a lot loan

The requirements for lot loans vary, depending on the lender. Lot loans tend to have strict requirements, since they are considered a risky loan for lenders. Because there isn’t any collateral to use on the land, the terms are usually higher.

  • Here are some of the criteria that borrowers need to meet to qualify for a lot loan:
  • The land being purchased must have already been zoned for construction, making it a lot. (If you want a loan for undeveloped land, you need a land loan.)
  • Although there isn’t specific limit, high credit scores are pretty much required for lot loans. It is unlikely to qualify for a lot loan for if your credit score isn’t at least in the high-600s.
  • Lenders are unlikely to offer a lot loan with less than a 20% down payment, or higher.
  • Some lenders may ask for you to provide additional collateral, since there is no home to use as collateral on the land.
Restructuring to a construction loan

One of the most popular things to do with a lot loan is to restructure it into a construction loan, after you are ready to start building. This is due to the fact that the timeline for repaying a lot loan is usually shorter. This can also make it easier to qualify for a construction loan, since you will already have established a relationship with the lender.