average interest rate for land loan

How to Get the Best Interest Rate on a Land Loan

If you’re in the market for a vacant lot to build a dream home or start a new business, securing financing can be tricky. Land loans come with higher interest rates and stricter requirements than traditional mortgages. But with the right strategy, you can still lock in an affordable rate.

I’ve purchased land in the past, so I want to share my experience and advice to help you navigate the process. The average interest rate for a land loan right now is around 7% – much higher than rates for standard home loans. Don’t let that scare you off though. Here are my top tips for scoring the best possible deal:

Shop Around Extensively

The first step is to cast a wide net and explore all your options. Land loans are a niche product, so not every lender will offer them. Smaller community banks and credit unions are more likely to provide land financing than big national lenders. I found better rates and terms by working with local institutions.

Spend time researching lenders in your area Look for ones with experience funding raw land purchases. Ask neighbors and friends for referrals too. The more quotes you can gather, the better chance you have of finding rate bargains I contacted at least 10 different lenders when buying my land. The range of rates was surprising – some wanted 8%+ interest while others quoted less than 6%. The spread makes it worth the effort to be exhaustive in your search.

Scrutinize Your Credit Score

Your credit score directly impacts the interest rate lenders will offer. So give yours a thorough review before applying for a land loan. Check all three major credit bureaus – Experian, Equifax, and TransUnion. Verify there aren’t any errors dragging down your score. If there are, file disputes to get mistakes corrected ASAP.

You generally need excellent credit – around 700+ – to qualify for a land loan in the first place. But minor differences in scores can affect rates too. For instance, improving from 720 to 740 could potentially save you 0.25% or more on your loan. I spent a few months monitoring my credit and paying down balances to push my score higher before moving forward. Those extra points translated into big savings.

Come Prepared with a Detailed Plan

Raw land is risky for lenders since it doesn’t produce income. To get approved, you’ll need to present a well-thought-out plan for how you intend to use the property. Provide as many specifics as possible on your building timeline and budget. My lender required blueprints, quotes from contractors, copies of building permits, etc.

The more prepared and concrete your proposal is, the more confidence it will give the lender. That can lead to better loan terms and rates for you. Being organized and ready with all the necessary documentation upfront helped my application stand out.

Make a Large Down Payment

In general, land loans require higher down payments than mortgages – often 25-50% of the purchase price. But the more you’re willing to put down, the better the rate you can qualify for. With a 50% down payment, I was able to secure financing below 6% interest.

Lenders view larger investments from you as less risky for them. If you default, they have more equity cushion on a property with a substantial down payment. Show you’re serious by putting as much down as you reasonably can. Just make sure to keep enough cash reserves so you can comfortably make loan payments too.

Ask About Discounts for Improvements

Not all vacant land is created equal. Undeveloped raw land with no access or utilities is riskier to finance than an improved lot with all infrastructure in place. Some lenders will reduce rates if you add improvements like grading, installing power lines, drilling a well, etc. I was able to get a 0.5% discount just by clearing brush and trees on my lot before construction.

Inquire with lenders about whether they offer rate reductions for certain upgrades. If so, you may want to make some enhancements to qualify for better terms. Just weigh the costs versus interest savings to see if the investment payoff makes sense.

Consider Alternatives like Seller Financing

Seller financing can be an attractive option with land purchases. If the seller owns the property free and clear, they may agree to finance your purchase directly at reasonable rates. This avoids the strict requirements and high rates of institution land loans. The downside is that terms are typically shorter – often 5 years or less.

I didn’t end up going this route but did discuss it with the seller. While the rate was appealing, the short time frame would have forced me to refinance to a standard loan quickly. Still, it’s worth exploring, especially if you plan to build fast. Just be sure to work with a real estate lawyer to formalize the financing agreement.

Apply for Specialty Construction Loans

If you’re building a home yourself on the land, look into a USDA Section 523 construction loan. These offer favorable fixed rates around 3% with low down payments for low-to-moderate income borrowers. The loan term is just two years, but that’s sufficient time to complete construction.

For contractor-built homes, a USDA Section 524 loan can provide better than market rates. I missed out on this option because my income was too high. But it’s worth checking if you may qualify. The SBA also has 504 loans that are another potential low rate source.

Bottom Line

Land loans don’t need to bust your budget. With an average rate over 7%, they can strain your finances. But smart shopping and preparation can help you beat the average and save substantially. I ultimately got an interest rate under 6% with strong credit, detailed plans, and contacting many local lenders. The extra effort was well worth it.