Buying land to build a house or start a business on can be an exciting prospect. However land is an expensive purchase that often requires financing. While banks are sometimes hesitant to provide loans for vacant land 30 year land loans are an option worth considering for your purchase. In this comprehensive guide, we’ll cover everything you need to know about 30 year loans for land.
What Are 30 Year Land Loans?
A 30 year land loan is simply a loan to purchase a vacant plot of land that has a 30 year repayment term. Just like with a traditional 30 year mortgage for a home, the loan is amortized over 30 years with a fixed interest rate and monthly principal and interest payments.
30 year loans are the most common financing option for land purchases because they offer low monthly payments stretched out over decades. This gives borrowers more time to develop the property while keeping payments affordable
Benefits Of A 30 Year Land Loan
There are a few key benefits that make 30 year loans a smart financing choice for vacant land:
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Low Monthly Payments – Since the loan is amortized over 30 years, monthly payments are lower compared to a 15 or 20 year loan. This improves affordability, especially if you don’t plan to generate income from the property right away.
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Fixed Interest Rate – 30 year loans come with a fixed rate that never changes over the life of the loan. This provides reliability and protects you from rising interest rates over time.
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Long Repayment Term – Having 30 years to repay the loan rather than 15 years gives you more flexibility. It allows you ample time to increase the value of the land before the loan matures.
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Prepayment Flexibility – 30 year loans allow you to pay extra each month or repay the balance early without penalty. This enables you to pay off the loan faster if you’d like.
Drawbacks To Consider
While 30 year land loans have many perks, there are also some potential drawbacks to weigh:
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Higher Interest Rate – The longer loan term comes with a higher interest rate compared to shorter term loans. You’ll pay more interest over the full 30 years.
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Less Equity – With a slower amortization, it takes longer to build equity in the land. After just a few years, you may still owe close to what you originally borrowed.
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Later Ownership – You won’t fully own the land until the loan is paid off in 30 years. If you need ownership sooner, a shorter term may be preferable.
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Strict Eligibility – Lenders are quite stringent about eligibility for 30 year land loans. You’ll need stellar credit and a hefty down payment.
What Land Can I Buy With A 30 Year Loan?
You can utilize a 30 year loan to purchase just about any type of vacant land, including:
- Raw land with no improvements
- Partially cleared land with some basic improvements
- Fully surveyed and permitted land ready for construction
- Large or small acreage
- Commercially zoned land
- Land in rural or urban locations
The condition of the land will impact loan eligibility. Most lenders prefer at least partially usable land with road access. Raw untouched land often requires a larger down payment or shorter loan term.
What Are Interest Rates On 30 Year Land Loans?
Interest rates are a key factor that影响 the cost of financing land with a 30 year loan. Land loan rates are generally 0.5% – 1% higher than rates for primary home mortgages. This accounts for the increased risk lenders take on with vacant land.
Here are some current rate ranges you can expect with a 30 year fixed rate land loan:
- Excellent Credit: 5.5% – 7%
- Good Credit: 6% – 8%
- Average Credit: 6.5% – 9%
Rates vary by lender and your specific qualifications. The best rates go to borrowers with high credit scores, low debt-to-income ratios, and substantial down payments.
How Much Down Payment Is Needed?
Down payments for 30 year land loans are usually 20% or more of the purchase price. Some lenders may accept as little as 15% down. Requirements vary:
- Raw land – Expect to put down 30% to 50%
- Partially improved land – 20% to 30% down is common
- Fully permitted land – May qualify for 20% down
Coming up with this substantial down payment can be a challenge. Working extra, saving aggressively, liquidating assets, or borrowing from a 401k are some options. The higher your down payment, the better the loan terms you can qualify for.
Who Offers 30 Year Land Loans?
Obtaining a vacant land loan can be tricky since not all lenders finance them. Local banks and credit unions are a good starting point. You may also have luck with these national lenders:
- LoanDepot
- New American Funding
- Guild Mortgage
- NBKC Bank
Mortgage lenders sometimes partner with banks they work closely with to provide land loans while handling the home loan. This gives you a one stop shop option.
Alternatives To A 30 Year Land Loan
If you have difficulty qualifying for a 30 year land loan, there are some alternative financing options including:
- Seller financing – The seller carries the loan instead of a bank
- Home equity loan – Use existing home equity to purchase the land
- 15 year loan – Shorter term may have easier eligibility
- Construction loan – Finance the land as part of a construction loan
- Hard money loans – Asset-based loans from private investors
These options usually come with higher rates and costs, but can be great resources if you’re having trouble qualifying for a standard 30 year land loan.
Tips For Getting Approved
Since lenders are quite conservative when it comes to vacant land loans, you’ll need to put your best foot forward to get approved. Here are some tips:
- Shop with multiple lenders to find the best rates and terms
- Work to boost your credit score above 740
- Lower your debt-to-income ratio as much as possible
- Put down at least 25% if you can
- Clearly explain plans for using the land to build equity
- Highlight any land improvements already in place
Bringing a lot to the table in terms of your financial profile and the land’s condition will help your chances tremendously.
The Bottom Line
Despite more stringent eligibility requirements, 30 year loans remain the top choice for financing land purchases. Their long term, fixed rates, and low payments provide an affordable way to buy and hold vacant land for future development. Just be sure to shop with lenders that offer land loans and put your best financial foot forward during the application process. With the right preparation, you can reap all the benefits of a 30 year loan to buy your ideal parcel of land.
Land Loans vs Traditional Mortgages
Banks and other lenders tend to view land loans with a wary eye, and consider them to be more of a risk than a standard mortgage. The reason for this is simple. Borrowers are much less likely to walk away from a home loan, particularly if the property is being used as a primary residence. Moreover, a house on a lot has greater value on the open market, and makes for a more secure form of collateral. Undeveloped land, on the other hand, doesnt deliver the same degree of investment security for the creditor.
People are much more likely to walk away from a land loan than a mortgage, potentially leaving the lender with an unimproved parcel of land which they will have to sell to recoup their losses. Consequently, land loans can be more difficult to obtain, particularly if you dont have a definite plan in place to improve the property and increase its value. Banks also tend to charge a higher rate of interest to offset the additional risk.
There are a number of variables that can influence your financing options when buying a piece of land. The most important of these is the land itself, its location, and how it will be used. While any parcel of land has some intrinsic value as a real asset, you are much more likely to be approved for a loan if you can show that it also has value as an investment. Location is key, and lenders are much more likely to underwrite a loan for a prime piece of desirable real estate than for a plot of land in the outskirts of nowhere. Should you default on the loan, they will have an easier time disposing of the collateral and offsetting any potential losses.
Another key consideration for lenders is the nature of the land you will be buying. For example, raw land is deemed a far greater risk, and is much more difficult to finance. Thats because it lacks any man-made improvements (clearing, roads, sewer, water), and it will take a major influx of time and money to increase the lands market value. Buying raw land can be significantly cheaper than buying already improved land, but it will be harder to find a lender willing to finance your purchase. If you do find a lender willing to work with you on your purchase of a raw parcel, you may find that your loan will fall under the umbrella of commercial lending, in which case you should expect higher interest rates and more restrictive repayment terms.
Finally, lenders are also interested in how youre going to utilize the land itself. Do you have plans in place to further improve the land, bringing it up to local codes and preparing it for construction? Are you planning to build on the land immediately, or will you be holding onto the parcel as an investment property? These are important points to consider, because they can greatly impact your ability to get a loan written at favorable terms. If you are planning to build on the land immediately, and you have construction plans in place, you are more likely to be approved by a lender. Moreover, you may qualify for a construction-to-permanent loan covering both the purchase of the land and the building project.
If you are shopping for a land loan, the first place to start is with a local bank or credit union. Local is key here, because as part of the community the lending institution will have a better idea of the value of the land you are planning to purchase. Local lenders also have a vested interest in the growth and sustainability of the community itself, and as such may be more likely to underwrite a land loan than a national lender with little or no regional presence. That being said, when borrowing money from a local bank or credit union you should be prepared to overcome some challenges, and you may have to shop around until you find a lender willing to give you a loan with satisfactory terms and interest rates. Keep in mind, that lenders consider land loans to carry a higher risk, particularly if you have no immediate plans to build on your lot, and as such they may be subject to the following restrictions:
Lower Lending Limits – Even if your credit is in great shape, the lender may put a cap on the amount of money you can borrow against your purchase. Again, this is to offset the inherent risks associated with land loans. People with bad credit will have even lower limts.
Larger Down Payments – Land loans typically require a larger down payment than traditional mortgages, often as much as 20% to 30% of the asking price. If you are purchasing raw land, the preferred down payment can be as much as 30% to 50% of the total cost.
Higher Interest Rates – Again, due to the high risk nature of land loans you should expect to receive a higher than average interest rate from your lender.
Shorter Loan Terms – Land loans typically have shorter, and more restrictive, repayment terms. You may be able to extend the loan terms if you qualify for a construction-to-permanent loan. If you are intending to purchase raw land, you should expect the loan terms to be even more restricted, with terms be limited to under 10 years.
While it may be easier to secure a loan from a local bank or credit union, you should be prepared to pay some additional fees over and above the cost of the loan itself. These fees are mandatory, and are used to cover the following requirements:
- Title Search
- Title Insurance
- Land Appraisal
- Land Survey
- Attorney Fees
As always, the bank or credit union will review your personal credit history before approving you for any loan. It will also have a significant impact on how that loan is written, what interest rates you are offered, and how much of a down payment you will be required to pay up front. Before you apply for a land loan, review your credit report and credit score so you can come to the negotiating table fully informed.
Owner financing is an attractive alternative to traditional lenders, and in some cases may be easier to obtain. Of course, in this scenario financing is entirely left to the discretion of the land owner, so you will have to be prepared to negotiate a favorable deal. Still, if you have been turned down by your bank or credit union, owner financing is your next best option.
When it comes to buying land, there are two basic forms of owner financing – ‘contract for deed and ‘mortgage/trust deed. Each has its own advantages and disadvantages for both buyer and seller.
Sometimes referred to as a ‘land installment contract, this allows the buyer to pay the land owner in installments over a predetermined period of time. Typically, there is a final balloon payment that further compensates the seller for financing the purchase. The upside of contract for deed financing is that it is often easier to obtain, particularly for people with poor credit scores or less than perfect credit histories. The downside is that the seller retains the deed to the land in question, and only transfers it when the debt is fully paid. If you, as a buyer, are thinking long term this is an excellent solution. However, if you have a construction plan in motion it will be delayed until rights to the land are fully transferred.
Also called a ‘deed of trust‘, in this option the seller will issue a deed to the buyer in return for a promissory and mortgage contract. The promissory note guarantees payment to the seller, and the mortgage acts as collateral against the promissory note. The benefit here is that the buyer has immediate access to the land, so you begin construction as soon as youre ready. The downside is that you will have to negotiate with a third party lender to establish the mortgage. However, having a building project in motion should make it easier to secure a mortgage to back up your promissory note.
Home Equity and 401(k) Loans
Finally, if you have sufficient equity in your home, you might consider borrowing against it to pay for your land purchase. The advantages here are clear. Home equity loans are fairly easy to obtain (assuming, of course, that your credit is in decent shape and your mortgage payments have been handled responsibly). Home equity lines of credit also carry fairly low interest rates, and very favorable repayment terms. Depending on the cost of the land you are planning to purchase, this can be an ideal solution.
Using the assets in your 401(k) to buy land may be an option, but only if your employer is willing to allow you to borrow money from the companys retirement plan. There is no law requiring employers to allow employees to borrow from their existing 401(k), so this option may not be available to everyone. Its worth noting, however, that even if you are authorized to borrow against your 401(k) you will only have access to a limited short term loan. Depending on the cost of the land you want to purchase, this may or may not be sufficient. Having said that, borrowing against your retirement savings can be a lower cost alternative to traditional financing.
Land loans are typically more difficult to obtain than other secured loans, but any challenges to your loan application can be overcome if you have a definite plan in place to improve the land and increase its value as an investment opportunity for your lender.
As with any loan, you should be prepared to shop around for the best options, and take the necessary time to secure the best deal possible. Because land loans are considered riskier investments, they often come with more restrictive terms and conditions, so it is doubly important to understand your current financial status and to have a plan in place to repay the debt on time and in full. Borrowers have very little wiggle room when it comes to land loans, and it pays to think a few steps ahead. As always, before signing any contracts be certain that you fully understand the terms and conditions of your loan, and your responsibilities as a debtor.
How to Get a Land Loan (And What to Know Before You Do)
FAQ
What is the longest loan term for land?
Can you borrow money from your land?
Are land loans the same as mortgages?
How much is the down payment for land in California?
How much down payment do you need for a land loan?
If you are purchasing raw land, the preferred down payment can be as much as 30% to 50% of the total cost. Higher Interest Rates – Again, due to the high risk nature of land loans you should expect to receive a higher than average interest rate from your lender.
Does FBN finance offer a 30-year farm land loan?
FBN Finance, a major player in the field, is quoting nearly 7.30 percent for its 30-year Farm Land Loans. The rate you’ll receive is also tied to your down payment amount and creditworthiness. Because these loans tend to be more expensive, it’s all the more important to take your time to compare multiple lenders before you settle on one.
Can you get a loan for a land purchase?
Getting a loan for a land purchase can be more difficult than getting a traditional mortgage. Fewer lenders offer land loans, and because there is more risk involved, they typically require a higher down payment, impose higher interest rates, and offer shorter repayment terms.
How much can you borrow for a land loan?
As for how much you can borrow for a land loan, your approval will depend on factors like the type of land you’re buying and your lender’s preferences. One lender might help you finance up to 85 percent of the cost of developed land, for example, or 70 percent of the cost of raw land.