How Do Land Loans Work in Texas?

May 25, 2022

Texas business owners love to dream big. For some owners, that dream may be buying land, either for a future development project or even for farming purposes. The journey to land ownership includes understanding how land loans work in Texas and securing the financing needed to make your dreams of land ownership a reality.

Discover how land loans work, the different types of land loans available, the application process, and why Texas Gulf Bank is the ideal loan partner for you.

What is Considered a Land Loan in Texas?

Land loans are short-term loans used specifically for buying land, and they generally come with more rigorous lending requirements than a typical mortgage or commercial construction loan. 

Because land loans are often used to purchase undeveloped property, lenders typically require a larger down payment, a shorter repayment period, and slightly higher interest rates than a traditional business loan for improved real estate.

Loan amounts, interest rates, and loan agreement terms will depend on the type of land purchased, any future improvements to the property, and the long-term intended use. For example, a property that will ultimately be used for farmland or ranching carries different risks than a property that would be used for development purposes.

Land loans can be ideal for a business owner for three important reasons:

1. Business owners can acquire land for strategic future growth, such as investing in property that will eventually have development all around it, thus raising the value of their own property. They can acquire land for a lower asking price knowing that the demand and price for their property may significantly rise in the future.
2. Other business owners may buy and hold property until they’re ready to expand into a larger facility for their own company, using built-up equity as leverage for future construction projects and funding. 
3. Farmers and ranchers can use a land loan to acquire new land that they would like to cultivate and use to generate cash flow to support their existing operations.

Types of Land Loans Available for Your Business

Financing for land loans can vary depending on the condition of the land being purchased since there are different risks and development factors to consider.

There are three types of land loans available for potential borrowers:

1. Raw land loan. This is a loan for an undeveloped property with no roads, sewer lines, or electricity. Raw land is a popular choice because of the flexibility in how the property can be used and developed. The property prices are generally lowest for raw land because of the future work and cost involved to develop the property, but borrowers may be required to put down a larger down payment and may experience higher interest rates.
2. Unimproved land loan. These loans are for plots of land with some improvements such as basic road access and limited utilities in place. You can typically find this type of land in rural areas along the Texas Gulf Coast.
3. Improved land loan. These properties have full access to roads, water, and electricity. Improved land tends to have higher purchase prices because the land has already been improved, but you may benefit from a smaller down payment and lower interest rates.

Texas Gulf Bank can help you identify which type of land loan is best for your specific needs. We’ll help you make a proper assessment and discuss the various financing options available to your business.

How to Qualify for Financing

Qualifying for a land loan involves two key steps: providing financial records and offering details about your immediate and long-term plans for the land being purchased. 

Financial Information Required

Land loans are subject to the typical requirements associated with obtaining any other business loan. Typically, we require that your business has an adequate history of operating profitably and that you can confirm sufficient collateral coverage and capital reserves.

Generally, the business owner(s) will need to personally guarantee the loan. We also expect that both the company and the guarantor(s) will have good credit indicators available. Required documentation usually includes but is not limited to three prior years of business financial statements and tax returns, plus the most recent monthly or quarterly interim statements.

Additionally, we ask that guarantors provide personal tax returns for the past three years, a current personal financial statement and meet minimum credit score requirements of the Bank to secure financing. 

Land Conditions and Future Plans

A major part of the land loan application process is providing detailed information about the land itself and how the land will be used. For example, if the property will be used for agricultural purposes, our Farm Plan form would need to be completed as part of the loan application.

We also require borrowers to provide specific collateral documentation about the land. This typically includes the following elements:

• Land surveys
• Property appraisals
• Flood plain proximity
• Agricultural exemptions
• Environmental reports based on the historical use of the property.

Ultimately, the future use of the land will determine both the lending viability and the documentation that you will need to provide our bank to consider your loan application.

Texas Gulf Bank Can Help With Your Land Loan

At Texas Gulf Bank, our top priority is relationships. We develop long-term relationships and truly get to know our customers so that we can better understand your business goals.

Our team of expert lenders will be happy to discuss your need for a land loan, the plans for your business, and how you plan to use the land to generate revenue. This way, we can help determine financing options that are best suited for you.

To learn more about how land loans work in Texas, we recommend that you visit with a lender at Texas Gulf Bank to discuss your land loan options and begin your journey toward property ownership. To get started on a conversation, reach out to us through the contact form below.

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