Purchasing land to build a home or start a business is an exciting endeavor. However, financing the purchase through a land loan can be confusing, especially when it comes to rates and terms. This comprehensive guide breaks down everything you need to know about land loan rates and terms so you can make an informed decision.
What is a Land Loan?
A land loan, also known as a lot loan, is a type of financing used solely to purchase a plot of land The land can be raw, undeveloped land or a parcel that’s ready for construction Land loans provide an alternative path to homeownership or commercial property ownership without having to buy an existing structure.
Unlike a construction loan a land loan doesn’t require you to be ready to build right away. However most lenders do want to see a solid plan for how you intend to use the land before they’ll finance the purchase.
Land Loan Rates
Land loans tend to have higher interest rates than traditional mortgages. Here are a few key factors that determine your land loan rate:
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Credit score As with any loan your creditworthiness plays a major role. Expect higher rates if your score is below 700.
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Down payment: The higher your down payment, the lower your rate. Come ready with 20% to 50% of the purchase price.
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Land type: Financing raw land is riskier for lenders than improved land, so expect to pay more in interest on undeveloped land.
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Loan term: Shorter loan terms mean higher monthly payments, so longer terms of 15 or 30 years can help secure a lower rate.
In mid-2023, land loan rates are averaging around 7% or higher compared to about 5.5% for traditional 30-year mortgages. Shop around and compare rates from multiple lenders before committing.
Land Loan Terms
Land loan terms differ from standard mortgages in a few key ways:
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Higher down payments: Expect to put down at least 20% if your land is already developed. For raw land, your down payment may need to be 50% or more.
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Shorter repayment periods: Land loans may come with repayment terms of 5, 10 or 15 years versus the typical 15 or 30 years for mortgages.
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Higher monthly payments: The combination of higher interest rates and shorter repayment timelines means you’ll have higher monthly payments. Factor this into your budget before borrowing.
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Prepayment penalties: Some lenders charge you a penalty fee for paying off your loan early. Make sure you understand any prepayment policy before signing.
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Balloon payments: Land loans may contain a balloon payment, which is a large final payment due at the end of the loan term to pay off the remaining balance. Prepare for this payment in advance.
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No home as collateral: With a mortgage, your home itself serves as collateral that can be seized if you default. But with a land loan, the lender has nothing to take back except the land.
As you can see, land loan terms require more rigorous financial planning than a standard mortgage. Make sure you understand the rate lock periods, fees, and other fine print before committing.
Types of Land Loans
There are a few different options when it comes to obtaining a land loan:
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Local bank or credit union: Smaller local institutions are often more willing to finance land purchases than big national lenders. They also may have better insight into land values in the area.
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Farm Credit System: This nationwide government-sponsored network of lending institutions offers competitive rates on loans for agricultural properties.
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SBA loans: The U.S. Small Business Administration guarantees loans made by approved lenders to qualified applicants looking to purchase land for commercial purposes.
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USDA loans: The U.S. Department of Agriculture provides low-interest land loans to low- and moderate-income applicants in rural areas.
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Seller financing: Some landowners offer financing themselves for a quicker sale. But interest rates tend to be higher.
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Home equity loan: If you have substantial home equity, you may be able to leverage it for your land purchase via a home equity loan or HELOC.
Always compare multiple lender options to find the best rates and terms for your situation.
Tips for Getting the Best Land Loan Rates
Follow these tips to help secure the most favorable land loan rates and terms:
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Get preapproved. Going through preapproval determines the loan amount and rates you qualify for. Enter actual loan shopping armed with this information.
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Boost your credit score. Aim for a minimum score of 720 before applying. Pay down debts, dispute errors to improve your profile.
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Make a sizable down payment. Put down 20% or more if possible. More equity can help you qualify for lower rates.
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Know your plans. Lenders are more likely to offer better rates if you have clear plans for using the land.
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Consider seller financing. Though not ideal, it can make sense if you get a below market interest rate without traditional loan qualification.
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Explore USDA options. USDA land loans offer fixed low rates, long terms, and no down payment requirement for low-income applicants.
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Compare multiple lenders. Don’t take the first offer. Evaluate rates and terms from different banks, credit unions, and other financing companies.
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Negotiate. Once you have competing offers, negotiate for the lowest rate possible before accepting one. Q
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Lock your rate. Rates fluctuate frequently. Lock in your rate as soon as you find the best deal available to avoid it going up later.
With the right preparation and research, you can secure favorable financing for your dream land purchase. Just make sure you understand the rates and terms thoroughly before signing any land loan agreements. Reach out to lenders and discuss your specific financial situation to chart the best path forward.
Finance the perfect spot for your dream home
A land loan allows you to purchase a lot and stake your claim before you ever begin to think about construction, alleviating a few of the unknowns that can come along with a new home build.
To speak to the Mortgage Department, call 210-945-3300, select option 3, then option 2. Land Loan – 4 year
Let us walk you through the mortgage loan process
Buying a home is a big commitment and you’ll want your finances to be in good condition before you start the process to ensure the best possible outcome. Gather your financial information, like recent tax returns, financial statements and pay stubs; your loan application will let you know what financial information is necessary. You should also review your credit score, take a look at your debt-to-income ratio (DTI) and take other important steps to position yourself for receiving the best possible loan terms. Click the button below to read our document on “Maintaining Your Financial Status and Credit Score” for tips to help guide you through the process.
2. Decide what you can afford
Before you begin shopping for a home, take a look at your budget and current expenses to determine what you can afford. You’ll want to evaluate your monthly incoming and outgoing funds to see where a down payment, closing costs and your new mortgage payment might fit in.
Once you know how much home you can afford, complete the application for a pre-approval letter. The pre-approval will let sellers know that you are a qualified buyer who is prepared to make a home purchase.
4. Find your home
Now’s the time to determine all the traits that make up your perfect home. Research areas and neighborhoods of interest. Also, connect with an RBFCU preferred real estate agent, who can help you search smarter.
You’ll complete the application process you started with your pre-approval request by submitting your documents and continuing through the loan process. This may sound simple, but it can be a big undertaking, depending on your employment status, residency, etc.
6. Finalize your loan
Our Mortgage Lending Team will help you through each step of the loan process and make sure you know everything you need to know to close your loan with confidence.
- The amount you would like to borrow
- The number of years you want to finance your loan (term length)
- Your current employment and income information
- Your phone number and email
- Information for joint borrowers you plan to include on the mortgage loan (including date of birth, address, income and employment, Social Security number and contact information; if applicable)
- An idea of the total amount you would like for your loan and monthly payments
For a list of all the documents often required to complete your purchase, download our Mortgage Application Checklist.
How to Get a Land Loan (And What to Know Before You Do)
FAQ
What are current land loan rates in Texas?
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Term
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Rate
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APR*
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5 Year
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6.25%
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6.89%
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10 Year
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6.50%
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6.85%
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15 Year
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6.50%
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6.75%
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Minimum Loan Amount is $15,000 Required Down Payment is 20%
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How long are most land loans?
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Land Loan
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Home Loan
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Purpose
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Purchase vacant land to build a new home someday, or to purchase land for recreational use
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Purchase an existing home
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Term
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Up to 15 years
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Up to 30 years
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What is the best type of loan for buying land?
Are mortgage rates the same for land?
What is a lot loan?
Lenders consider raw land as the least desirable collateral for all land uses. Most will require more money down (up to 50 percent) and charge a much higher interest rate. Lot loans are usually available from local lenders and some national lenders. A lot loan typically consists of one or more building sites for residential construction.
Are land loan interest rates higher than mortgage interest rates?
Each type of land loan has its own criteria for applicants. However, there are still some general guidelines to be followed when applying for a land loan: Taking these factors into account, a lender can determine the loan rates and obligations. As a result, land loan interest rates tend to be higher than mortgage interest rates.
What is a land loan vs a mortgage?
Land loans typically have shorter repayment periods than a mortgage, increasing your monthly payment amount. They often include a balloon payment —a large one-time payment due at the end of the loan term. Not all lenders offer land loans, so it’s important to do your research to find a lender that specializes in this type of financing.
How much down payment do you need for a land loan?
Some land loan lenders require a substantial down payment — ranging from 20 percent to 50 percent of the purchase price — and charge higher interest rates. Others have significantly shorter repayment terms than a 15- or 30-year mortgage, as well, or specific requirements, like a cap on the amount of acreage.