Buying land to build a home, start a business, or invest in real estate is an exciting prospect. However, land can be expensive and financing may be required. There are several types of loans that allow you to buy land, each with its own pros, cons, and qualification requirements. This article will provide a detailed overview of the most common loans people use to purchase land.
Conventional Land Loans
The most straightforward option is a conventional land loan from a bank or mortgage lender. These loans function similarly to a regular mortgage, requiring a down payment of usually 20-25%, and allowing you to finance the remainder of the purchase price.
Pros:
- More widely available than other land loan options
- Potentially lower interest rates than specialized loan programs
Cons:
- May require a higher down payment than other options
- You’ll need good credit and income to qualify
Conventional land loan requirements
- Down payment of 20-25%
- Credit score of at least 620
- Debt-to-income ratio below 43%
USDA Land Loans
USDA land loans are offered by the U.S. Department of Agriculture to help low to moderate income buyers in rural areas. These loans offer favorable terms, including:
Pros
- 100% financing available, no down payment required
- Below market interest rates
- Low mortgage insurance costs
Cons:
- Property must be in an eligible rural location
- Income limits apply
USDA land loan requirements:
- Property must be in a designated rural area
- Total household income must be below income limits set by USDA
- Must be used as your primary residence
VA Land Loans
Veterans and active military may qualify for a VA land loan guarantee VA loans offer favorable financing with no down payment required
Pros:
- 100% financing available, no down payment needed
- Lenient credit guidelines
- No mortgage insurance required
Cons:
- Can only be used by eligible veterans, active military, and surviving spouses
- Strict property requirements
VA land loan requirements:
- Must be eligible veteran, active duty, or surviving spouse
- Property must meet VA requirements
- Intend to build a home on the property
Seller Financing
Seller financing involves the property seller providing financing directly to the buyer. This allows the seller to collect interest and removes the need for traditional mortgage lending.
Pros:
- May qualify when you can’t get a traditional mortgage
- Potentially easier to negotiate favorable terms
- Lower down payments or interest rates
Cons:
- Higher risk for the seller
- Less protections than traditional lending
Seller financing requirements:
- Varies case-by-case, but good credit and down payment required
- Purchase price limits may apply
Home Equity Loan
If you have sufficient equity in your home, you may be able to take out a home equity loan or home equity line of credit to fund a land purchase.
Pros:
- Can access funds even with lower credit scores
- Interest may be tax deductible
Cons:
- Your home is collateral, risk of foreclosure
- Higher interest rates than traditional mortgages
Home equity loan/HELOC requirements:
- Usually need at least 15-20% equity in your home
- Higher debt-to-income ratio may be allowed
Commercial Land Loans
Businesses can acquire financing to purchase land for commercial use, such as land development, or to build office spaces or retail stores.
Pros:
- Variety of term lengths available
- Potentially high loan amounts
Cons:
- Down payments of at least 20-25% required
- Strict underwriting standards
Commercial land loan requirements:
- Minimum down payment of 20-25%
- Strong business financials and credit score
- Thorough business plan detailing land use required
Choosing the Best Land Loan
When researching loans to buy land, consider your credit score, desired down payment, land use plans, and eligibility for specialized programs. Conventional mortgages offer more flexibility, while programs like USDA and VA loans help eligible buyers get financing with no down payment required.
Work with a reputable lender and be prepared to provide your full financial details along with your plans for the land. With an understanding of the different land loan programs available, you can find financing that fits your budget and goals.
Home Equity Loan
A buyer with existing property and little debt may want to consider a home equity loan. This type of loan taps the equity of the existing property, granting much better terms than any regular construction or land loan.
What Is a Land Loan?
A land loan is a type of credit that is used to finance the purchase of a plot of land. It’s sometimes called a lot loan.
You can take out a land loan if you’re interested in buying a piece of land to build a home. You can also use this type of loan to buy land to use for business purposes. The type of loan you take out, and how easy it is to qualify for, will depend on where you buy land and how you intend to use it.
A land loan is more complex than a standard mortgage. For one thing, there’s no home to act as collateral for the land loan. And normally, you can’t buy land with no money down. There are also several different types of land loan, designed to facilitate different uses for a land lot.
- Getting a land loan creates a different set of challenges compared to applying for a mortgage on a house.
- For example, because lenders require surveyed boundaries, you’ll need to check zoning and land use restrictions on the property, as well as access to utilities and public roads.
- A build-ready lot will lower your borrowing cost compared with one that needs improvements.
- Other potential financing options include seller financing, local lenders, or a home equity loan.
- Rural land may qualify for a U.S. Department of Agriculture (USDA) subsidized loan.
How to Get a Land Loan (And What to Know Before You Do)
FAQ
What is the best type of loan for land?
Which loan is best for buying land?
How hard is it to borrow money to buy land?
Is a loan for land different than a mortgage?
What types of loans are available to buy land?
There are several types of loans available to purchase land. The best type of loan for you will depend on the condition of the land, what you plan to do with it and any personal financial factors at play. 1. Land loans from local banks and credit unions Best for: Buyers with excellent credit who can afford a large down payment
What are the best financing options for a land purchase?
The best options to finance a land purchase include seller financing, local lenders, or a home equity loan. If you are buying a rural property, be sure to find out if you qualify for a USDA subsidized loan. Getting a land loan has a different set of hurdles for buyers compared to applying for a mortgage.
What is a land loan?
A land loan – sometimes referred to as a lot loan – is used to finance the purchase of a plot of land. You can take out a land loan if you’re interested in buying a piece of land to build a home or use for business purposes. The type of loan you take out will depend on where you’re buying land and how you intend to use the land.
How can I finance land?
Here are a few ways you might be able to finance land. 1. Bank or credit union loan While not every lender offers land loans, you’ll be able to find many banks and credit unions that do offer loans to buy land. There are also specialty lenders like farm credit organizations that offer land loans.
Do all lenders offer land loans?
While not every lender offers land loans, you’ll be able to find many banks and credit unions that do offer loans to buy land. There are also specialty lenders like farm credit organizations that offer land loans. Banks and credit unions may have different programs for raw land and improved land.
Can a land loan be used to buy a property?
You can use a land loan to buy a property even if you don’t want to build immediately. Land loans allow you to build a home or develop your business with flexibility. Land loans may be cheaper than alternatives such as personal loans. Fewer lenders offer land loans than traditional mortgages.