Banks That Offer Land Loans: Your Guide to Financing Undeveloped Property

Purchasing a vacant lot or undeveloped land can be an exciting way to invest in real estate or prepare for your future dream home. But most people need financing to buy raw land. While not all lenders provide loans for vacant property, there are several banks and credit unions that offer land loans.

In this comprehensive guide, we’ll cover everything you need to know about getting a loan for your land purchase including

• What are land loans and how do they work?
• What types of lenders offer land financing?
• Land loan requirements and qualification criteria
• Pros and cons of land loans vs other financing options
• Tips for finding and applying for a land loan

What Are Land Loans?

A land loan also called a lot loan is a mortgage loan used specifically to purchase undeveloped land. The land itself acts as collateral for the loan.

Land loans work similarly to traditional mortgages in that the borrower makes monthly payments over a set repayment term. However, land loans tend to have higher interest rates and shorter terms of 1-5 years. At the end of the term, the remaining balance must be paid off as a balloon payment.

Land loans allow buyers time to hold and develop property for future use, like building a home, without requiring immediate construction. They provide financing for all types of unimproved land, including:

• Raw land – completely undeveloped with no access or utilities
• Partially improved – may have graded access road or basic utilities
• Vacant lots – indicated lots within a developed subdivision

Types of Lenders That Offer Land Loans

You have several options when it comes to finding a lender for your land purchase:

• Banks – Many national, regional, and community banks provide land loans, often with competitive rates. Local banks are a good place to start.
• Credit unions – Like banks, credit unions are a source for land financing, especially those with a strong real estate lending focus.
• Mortgage companies – Some national lenders and mortgage brokers offer land loans in addition to home loans.
• Farm Credit System – For rural land purchases, the Farm Credit System provides lending through farmer-owned cooperatives.
• Specialty lenders – Niche and non-bank lenders that concentrate specifically in land financing.

Certain government-backed loans can also be used to buy land in some cases, such as USDA and VA loans.

Land Loan Requirements and Qualifications

Compared to regular mortgages, land loans tend to have more stringent requirements. Typical criteria include:

• Down payment – Often 20-35% of the purchase price. More for raw land.
• Credit score – Minimum scores around 650-700, but requirements vary. Higher is better.
• Debt-to-income ratio – Maximum of 43% is common. Lower ratios preferred.
• Loan term – Usually 1-5 years. Shorter terms require larger payments.
• Interest rates – Typically 0.5 – 1% higher than mortgage rates.

You’ll also need to provide documents to verify income, assets, and your plan for the property. Approval is based on your financial profile and the lender’s assessment of the land’s value and development potential.

Pros and Cons of Land Loans

Pros

• Finance land purchases without requiring immediate construction
• Flexible terms from 1-5 years
• Only one closing – no need to refinance later
• Typically easier to qualify than construction loans
• Interest may be tax deductible

Cons

• Higher lending standards than mortgages
• Short repayment periods with balloon payments
• Often variable or adjustable rate financing
• Potentially prepayment penalties
• Difficult to sell undeveloped land if needed
• Non-collateralized so foreclosure is possible

Tips for Finding and Applying for a Land Loan

Follow these tips when you’re ready to move forward with financing your land purchase:

• Shop and compare rates from multiple lenders. Land loan rates can vary significantly.
• Look for lenders familiar with land values in the area. Local and regional banks are a good bet.
• Be prepared to provide a higher down payment, often 25% or more.
• Highlight your plan for the property, like future development.
• Know the land’s zoning, utilities access, and other details that affect value.
• Ask about prepayment penalties or balloon payments you’ll need to prepare for.
• Consider using an experienced real estate agent to assist with the buying and financing process.

Top Banks for Land Loans

While many mainstream and local lenders offer land financing, these banks are top options based on their land loan programs, rates, and reputation:

• Farm Credit Banks – Land loan specialists with competitive rates, especially for rural properties.
• Wells Fargo – One of the few national banks actively offering land loans with terms up to 30 years.
• Bank of America – Competitive land loan programs for qualified buyers and flexible term options.
• U.S. Bank – Regional bank with land financing products and knowledgeable real estate lenders.
• First Citizens Bank – Regional southeast lender with customizable land loans and construction financing.

Getting Preapproved for a Land Loan

Getting preapproved for a land loan before you start searching for property can give you a big advantage as a buyer. Preapproval provides evidence to sellers that you are qualified and able to complete the purchase. Here’s how it works:

• Submit your loan application and all required financial documents.
• The lender will evaluate your credit, income, assets, and debts.
• If approved, you’ll receive a preapproval letter with your maximum loan amount.
• With preapproval, you can shop for land knowing your price range and financing.
• The preapproval locks in your rate and terms for typically 60-90 days.

Though not guaranteed, a preapproval letter carries significant weight in the buying process. It shows sellers you’re qualified and ready to move quickly.

Finding the Right Land Loan for You

Purchasing raw land can be an exciting step toward your dream home or a smart real estate investment. But most buyers need financing to fund a land purchase. With higher lending standards, land loans aren’t as readily available as typical mortgages. However, if you have good credit, sufficient income, and adequate savings, there are lenders like community banks, farm credit associations, and specialty finance companies that provide quality land loan options. Taking the time to understand land loan requirements, weigh the pros and cons, and shop multiple lenders can help you find the ideal loan for buying your vacant property.