Getting a Bank Loan to Purchase Land: Everything You Need to Know

Buying a piece of land to build a home or start a business can be an exciting endeavor. However finding the money to purchase the land can be challenging. A bank loan is one way to finance a land purchase but qualifying for one requires some preparation and knowledge. In this comprehensive guide, we’ll walk through everything you need to know about getting a bank loan to buy land.

What is a Bank Loan for Land?

A bank loan for land, also called a land loan or lot loan, is financing provided by a bank to purchase a vacant plot of land The borrower will repay the loan amount plus interest over time, similar to a mortgage

Banks view land loans as riskier than home loans because vacant land has no structures or value added yet Therefore, interest rates are typically higher for land loans, and borrowers need excellent credit and a substantial down payment

Land loans can be used to purchase land for various purposes:

• Building a home
• Starting a business
• Real estate investment or speculation
• Agriculture or farming

Land Loan Types

There are a few main categories of land loans offered by banks:

• Raw land loans – For completely undeveloped land without any utilities or improvements. This option has the highest interest rates and down payment requirements.

• Partially improved land loans – The land has some basic utilities like electricity access but still requires significant development. Interest rates are lower than raw land loans but still carry higher risk.

• Improved land loans – The land is fully developed with all utilities, permitting, and access in place. This option has the lowest rates and easiest qualification standards.

Why Get a Bank Loan for Land?

There are several reasons why borrowers choose bank financing over other options:

• Lower rates – Banks can offer competitive interest rates, especially for borrowers with good credit. Rates are still higher than a mortgage but lower than other financing like credit cards.

• Fixed payments – Bank loans have fixed monthly payments, helping you budget and plan ahead. Payments stay the same over the full loan term.

• Access to capital – For expensive land purchases, a bank loan provides access to more capital than you may be able to save on your own.

• Build credit – Making on-time land loan payments helps improve your credit score over time.

Qualifying for a Land Loan

Qualifying for a land loan is more rigorous than getting approved for a home mortgage. Here are some key requirements banks look for:

• Down payment – Expect to put down 20-25% or more. The more you can put down, the better.

• Credit score – Aim for a minimum score of 720, but 740 or higher is better.

• Debt-to-income ratio – Lenders want to see a DTI of 36% or lower. The lower your existing debts, the more comfortable banks will be lending.

• Secure plan – Present detailed plans for how you intend to use the land to show lenders you are committed to the project.

The Land Loan Process

If you meet the baseline requirements, follow these steps to get a land loan:

1. Find the property – Research land for sale in your target area that meets your size, budget, and use goals.

2. Get pre-qualified – Talk to banks to get pre-qualified for an amount. This shows sellers you can pay and locks in an interest rate.

3. Make an offer – Make an offer on your chosen land and negotiate the purchase terms with the seller.

4. Complete loan application – Work with your lender to complete the full loan application and paperwork.

5. Obtain appraisal – The bank will order an independent appraisal to value the land.

6. Close on the loan – At closing, you’ll sign final loan documents and receive the funds to purchase the property.

7. Make repayments – Once the purchase is complete, you’ll begin making your monthly loan payments.

Tips for Approval

To boost your chances of land loan approval, keep these tips in mind:

• Put at least 25% down if possible
• Pay down existing debts to lower your DTI
• Highlight experience or knowledge relevant to your land use plan
• Purchase improved land over raw land if given the choice
• Shop around with multiple lenders to compare loan options

Alternative Land Financing Options

If you’re having trouble qualifying for a traditional land loan, here are a few other potential financing routes to explore:

• Seller financing – The seller handles the loan directly. Typically easier to qualify but comes with higher interest rates.

• Home equity loan – Leverage equity in your current home if you have substantial built-up value.

• Hard money loans – Asset-based financing from private investors at higher rates.

• Crowdfunding – Pool money from a large number of backers through an online platform.

• USDA loan – For agricultural land, low interest federal loans are available.

• Business loan – An SBA-backed loan if land is for commercial use.

The Bottom Line

While challenging to obtain, a bank land loan presents an affordable financing option to fund your land purchase compared to other alternatives. Be prepared with an excellent credit history, substantial down payment, and detailed use plans. Seek out banks open to land lending and explore all your options to secure favorable loan terms. With the right preparation and research, you can make your land ownership dreams a reality.