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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.

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