Understanding How Lot and Land Loans Work 

Thinking about buying land to build your dream home on? Getting familiar with lot and land loans can really help you navigate the process, especially if you’re planning for the future.  

Land and lot loans work differently than conventional mortgages and have different requirements that can be confusing. They’re intended to be used to buy the land where you will build your home and are often used in addition to a construction loan when you build your home. 

If you’re looking at land or a lot, Arkansas Federal Mortgage loan options can help. Feel free to reach out we’d love to help you explore your options. 
 

The Benefits of a Lot or Land Loan 

A lot or lot loan is a special type of financing to purchase vacant land, typically to build a home on later. One of the biggest advantages of a land or lot loan is flexibility to buy the land now and build when you’re ready. Plus, you can enjoy: 

1. Flexibility in Planning: With a land loan, you have the freedom to purchase the property now and develop it in the future. This can be particularly beneficial if you’re waiting for the right time to build or if you need to gather resources for your project. 

2. Investment Opportunities: Buying land can be a smart investment. As property values increase over time, your land may appreciate in value, providing potential long-term returns. A lot loan can help you secure prime land in a desirable location before prices rise further. 

3. Customizable Financing Options: Land loans often come with different financing options compared to conventional mortgages. You can choose between short-term or long-term loans, depending on your needs and financial situation. This flexibility allows you to find a plan that best fits your budget and timeline. 

4. Less Competition: The market for land loans can be less competitive than traditional home loans. This means you may have an easier time negotiating terms and securing a favorable interest rate, especially if you find a piece of land that is unique or underpriced. 

What Factors Affect Lot and Land Loans?  

The requirements for lot and land loans in Arkansas are similar to the kinds of requirements you may be familiar with for conventional mortgages. It’s important also to consider how you’ll be using the lot or land in the future because adding in a construction loan can change the requirements for your home-building project. Several factors can influence the interest rate and terms of your land loan, such as:  

1. Credit Score: Your credit score plays a huge role in getting a land loan. With Arkansas Federal, you’ll need a minimum score of 620. If you’re considering applying for a construction loan later, remember that the requirement might be higher. So, keeping your credit in great shape will work in your favor! If you’d like to check your credit score, you can do it for free using Credit IQ, available within Arkansas Federal Digital Banking. 

2. Down Payment: Arkansas Federal typically requires at least 25% down. This is standard for land loans, so ensure you’ve saved that up—it’ll make the process smoother.  

3. Debt-to-Income Ratio: Lenders like to see how much of your income goes toward paying off monthly debts. A lower ratio shows you’re in good financial shape, which can help you secure better loan terms. It’s all about presenting yourself as a responsible borrower. To figure out your debt-to-income ratio, take your total monthly debt payments, divide that by your gross monthly income (before taxes), and multiply by 100 to get a percentage.  

4. Land Loan Rates: When considering a land loan, it’s important to note that rates may be slightly higher than traditional mortgage rates. This is because land loans are viewed as riskier for lenders; vacant land can be more challenging to sell if you default on your loan. 

5. Loan Amount: The amount you want to borrow will also shape your options. For Arkansas Federal, there’s a minimum land loan amount of $20,000, so plan accordingly. 

Lot and Land Loan Options at Arkansas Federal 

Arkansas Federal has a long history of helping Arkansans build their dream homes, whether it’s on a lot in a subdivision or on land in a rural community. We offer a number of options to help Arkansas buy land.  

• 10-Year Loan with a 3-Year Balloon: Ideal for loans starting at $20,000 

• 15-Year Loan with a 4-Year Balloon: Suitable for loans of at least $50,000 

• 20-Year Loan with a 5-Year Balloon: Requires a minimum loan amount of $100,000 

These choices allow you to select the option that best fits your needs to buy your dream location for your future home! 

What are Lot and Land Loans Ballon Notes? 

A balloon note is a type of loan that allows for lower monthly payments during the initial term, culminating in a larger final payment—known as the balloon payment—due at the end. It’s an excellent option for land loans because it keeps your monthly payments lower and more manageable while you prepare to build. The best part? When you’re ready to begin building, you can transition your balloon note into a construction loan.  

If you’re considering rolling your balloon note into a construction loan, here’s how it works: you’ll make regular payments for a set period, and then that bigger balloon payment will be due at the end. By then, you should be ready to pay off the balloon note or secure a construction loan to kick off your building journey. If you’re not quite there yet, refinancing could be another option. 

What Happens if You Haven’t Build by Loan End? 

If you haven’t begun construction yet by the time your loan term is up, no problem—you can pay off the remaining balance or refinance your land loan. Most borrowers tend to refinance.   

How to Apply for a Land Loan with Arkansas Federal 

Our mortgage team will help you start the land loan application process when you’ve found the lot you want to purchase. The application is simple but having a few things prepared can help you make the process smoother and quicker. 

1. Know Your Credit Score: If your score needs some improvement, take some time to boost it before applying. Remember, you’ll need a score of at least 620 for a land loan and probably an even higher score for a construction loan down the line. 

2. Save for Your Down Payment: With a 25% down payment requirement, make sure you have enough saved up. For example, if you want to buy a $20,000 piece of land, you’ll need about $5,000 for the down payment. It’ll make the whole process a lot smoother. 

3. Review Your Finances: Take a good look at your debt-to-income ratio. If it’s a bit high, consider paying down some debt before applying. This can really improve your chances. 

Let’s Make Your Dream a Reality! 

Securing a land loan is a big step toward building your dream home, and with a little preparation, you’ll be well on your way! At Arkansas Federal, we’re here to help you find the right financing solution for your land purchase. Ready to take that first step? Let’s chat and make it happen!