Tennessee offers 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 to 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 can provide the funding you need to secure the land you want to purchase in Tennessee, but you should keep these requirements and considerations in mind when applying for one.
What is a Land Loan?
To buy a lot or piece of vacant land in Tennessee, you will need to get a land loan, otherwise known as a lot loan. Land loans are like mortgages for land in that 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 has no utilities or access to utilities and may not have a road leading to it. The lot is simply the land and what is naturally on it.
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 surveys, a detailed plan for its intended use, and a good financial history. Due to the higher risk involved, raw land loans tend to carry higher interest rates and stricter requirements, such as an excellent credit score or a larger down payment.
Unimproved land loan
Unimproved land is slightly more developed than raw land. The land or area could have a road or some utilities connected to it, such as electricity, but it may not have all the necessary utilities to build on, such as water or 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.
Improved land loan
Improved land means that all the requisite 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 costlier due to the value of its location.
How to Get a Land Loan in Tennessee
Getting a land loan is similar to getting any other type of loan in that the process requires a thorough application and screening of your qualifications. Generally, a lender will look favorably on a:
- 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, the lender faces a greater risk since there is no property collateral. Therefore, they must determine the land’s worth, usually through a land survey and zoning restrictions. The lender will also require documentation on the land’s boundaries, 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 of a Land Loan in Tennessee
Taking on a loan is always a big decision. Consider the pros, aside from the land in question, and cons before moving forward in the process.
Pros:
- 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 can build what you like on the land within zoning restrictions.
Cons:
- Although land loans can be relatively less expensive than land that is already developed, they do come with high-interest rates. They also tend to have large down payment requirements, often as much as half of the loan amount.
- Land loans are harder to get than other types of loans due to the higher risk. Lenders want to see a healthy, consistent financial history with high credit scores. If you have a lower credit score or don’t have the full 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. Setting your budget and knowing what you want to use the land for are just the initial steps to finding the right site. 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 a built home, it’s usually easier to know where the boundaries are, but when 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 under 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:
Seller financing
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.
Construction loan
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 for 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. 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 your chances of 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.
Information contained in this blog is for educational and informational purposes only. Nothing contained in this blog should be construed as legal, financial, or tax advice. A professional advisor should be consulted before making any financial transactions.
