Prospective land owners have access to three categories of loans when it comes to securing funding for a land purchase: raw land, unimproved land, and improved land. Understanding the very distinct differences among these loan options is crucial for informed decision-making.
Raw Land Loan
Raw land loans are among the most difficult to get approved for. Raw land lacks even the most rudimentary of infrastructure such as electricity, roads or sewers. This makes the deal extremely risky for lenders, and as such, rejection rate for these high risk loans is very high. For better chances of approval, expect to lay out a sizable down payment; upwards of 20%, and excellent credit scores are a must. Don’t be afraid to shop around for lenders. Loans for raw land sales will have higher interest rates in comparison to other land loans. Be sure to catalogue a minimum of three to five loan providers before making the commitment to secure the most favorable terms as a borrower.
Unimproved Land Loan
Unimproved land loans, distinct from raw land loans, are for parcels with pre-existing, though often non-functional or outdated, infrastructure like water, electricity, or septic systems. These amenities usually require significant upgrades or replacement to meet current codes and development needs.
For example, existing electrical connections might be inadequate for modern homes, or water lines could be faulty. Even basic utilities might lack modern necessities like high-speed internet. Securing these loans requires a detailed budget, a clear development plan, a substantial down payment, and excellent credit due to higher perceived risk. While interest rates are lower than raw land loans, they exceed those for improved land, reflecting the additional investment needed to develop the property.
Improved Land Loan
Improved land loans represent the dominant form of land financing in the real estate market. These specific parcels of land, already benefiting from the presence of established infrastructure such as roads, utilities, and communication networks, inherently command higher sales prices and boast a greater overall value when compared to their unimproved or raw land counterparts. While improved land often comes with a significant price tag and plots can be relatively scarce, its numerous advantages make it a highly desirable asset for developers and investors alike.
From a financial institution’s perspective, banks view improved land purchases as less risky propositions. The existing infrastructure mitigates many of the uncertainties associated with developing raw land from scratch. For developers, this translates into fewer logistical hurdles and a significantly expedited development timeline. This pre-existing infrastructure allows developers to focus more on construction and less on the foundational work required to make a site viable.
The application process for an improved land loan generally mirrors that of other conventional loan types, requiring a thorough review of the applicant’s financial standing, credit history, and a detailed plan for the land’s utilization. Ultimately, the decision to pursue improved land versus unimproved land hinges critically on the prospective developer’s individual preferences, their specific investment plans, and their long-term strategic goals for the property. Improved land offers a clear path to quicker development and a more predictable investment, making it a cornerstone of modern land financing.
Sherburne State Bank provides loans for land parcels and opportunities for investment among speculators in Becker, Monticello and Princeton, MN. Contact us to speak to one of our knowledgeable loan officers today!
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