What is a mortgage loan for land?

The purchase of a land can have many motivations: the desire to build its own home, keep it as an investment or extend another property. In many cases, the mortgage loan for the purchase of land is the most appropriate solution.

This type of loan has specific characteristics, different from those of a mortgage loan for housing, and the approval process can vary.

In this article, we will explore in detail that involves a mortgage loan for the land, what are the eligibility conditions, its advantages and disadvantages, as well as the steps necessary to obtain the financing.

What is a mortgage loan for land?

A mortgage loan for the land is a loan granted by a financial institution for the purchase of a land, having as guarantee that land or other real estate owned by the applicant.

The lands for construction are the most commonly funded by mortgage loans, but the conditions can vary significantly depending on the type of land and the subsequent plans of the applicant.

Conditions for obtaining a mortgage loan for land

1.. The eligibility of the applicant

a) stable income: The applicant must prove that he has sufficient income to repay the credit.

b) good credit score: The applicant’s credit history is evaluated to determine his ability to honor his financial obligations.

2. Type and location of land

Lands with available utilities (water, electricity, sewerage) are considered more valuable.

3. The documents of the land

• The urbanism certificate;
• The acts of land ownership
• The cadastral plan and the extract of the land book;
• The necessary authorizations, if it is case (for example, for construction).

4. The minimum advance required

The financial institutions usually require an advance between 15% and 40% of the value of the land, depending on its type and the bank’s policy.

5. Evaluation of the land

The bank will request the evaluation of the land by an authorized evaluator to determine its market value.

We invite you to read our article why it is important to assess the building when we talk about a mortgage loan

Advantages and disadvantages of a mortgage loan for land

Advantages:

• Access to funding for big purchases: A mortgage loan allows the purchase of valuable land without having the entire amount required in advance.
• Accessible monthly rates: The long reimbursement period can make the rates lower and easier to manage.
• Guarantee of the purchased land: The purchased land can serve as a guarantee, which reduces the need for other assets as a guarantee.

• The possibility of developing the land: After purchase, the land can be used for construction or other projects, increasing its value.

Disadvantages:

• High advance: The minimum amount required for the advance can be considerable, which can be an obstacle to some applicants.
• Additional costs: Land evaluation, notarial taxes and other commissions can add significant costs.
• Higher interest rates: In some cases, interest on land mortgage loans may be higher than for housing, due to the greater associate risk.
• Restrictions on land use: Lands without utilities or located in isolated areas may require additional investments to be usable.