Buying land to build your dream home on can be an exciting prospect. However, land purchases require significant financing and not all loans are created equal. In this comprehensive guide I’ll walk you through the pros, cons and key details of the best loan options to finance a land purchase so you can make an informed decision.
Overview of Land Loans
Also known as lot loans, land loans allow borrowers to finance the purchase of a vacant plot of land for building a home or commercial use. These loans are secured by the land itself.
Land loans have higher interest rates and stricter eligibility requirements than traditional mortgages because they are riskier for lenders. With no home value for collateral, land loans require excellent credit, large down payments, and a clearly defined construction plan.
While regular banks provide land loans specialty lenders are often a better option with more flexibility. Let’s look at the top specialty loan programs to finance land acquisitions.
USDA Loans
USDA loans, offered by the U.S. Department of Agriculture, are a great option for purchasing rural land for your primary residence.
Pros
- Very low fixed interest rates
- Flexible credit requirements
- No down payment required
Cons
- Limited to rural low and moderate income applicants
- Construction must begin within 6 months
- Not available for investment properties
USDA loans offer significant perks for eligible home buyers. With no down payment requirement and low rates, they provide affordable financing. Your new home must be built in a USDA-eligible rural area, and borrowers must meet income limits. The land purchase and construction financing are rolled into one loan.
SBA Loans
SBA 504 loans help entrepreneurs and small businesses purchase land for commercial use through the Small Business Administration.
Pros
- Low down payments of just 10%
- Below market fixed interest rates
- Long repayment terms up to 25 years
Cons
- Strict underwriting for credit/financials
- High origination fees
- Limited to commercial properties
If you need land for your startup or small retail business, SBA loans provide affordable financing options. 20-year fixed rate terms help keep payments low. Your business must be operated for profit and meet SBA size standards. The land collateral cannot exceed certain values based on use.
Farm Service Agency (FSA) Loans
The U.S. Department of Agriculture’s FSA loan programs help farmers and ranchers finance land purchases.
Pros
- Low fixed interest rates
- Flexible underwriting of credit/finances
- Option for joint financing from FSA and commercial lenders
Cons
- Strict farm income requirements
- Limited to purchases expanding current operations
- Limited loan amounts
FSA loans offer short-term financing for farmers looking to expand. These programs support family farms and new farmers unable to qualify for commercial credit. Borrowers must prove the land purchase improves the viability of their current farming operation.
Home Equity Loans
Borrowers can tap home equity to finance land purchases through second mortgages like home equity loans.
Pros
- Competitive interest rates
- No down payment needed
- Quick access to funds
Cons
- Higher rates than first mortgages
- Existing home is collateral
- Loan limits of 80-85% of equity
If you have significant tappable home equity, this can provide an easy, affordable way to borrow funds for a land purchase. Home equity loans don’t require down payments and have predictable fixed rates. Just beware of repayment risks if you default.
Seller Financing
Seller financing involves the property owner providing financing directly to the buyer.
Pros
- Easy qualification requirements
- Lower down payments
- Favorable rates and terms
Cons
- Less protections than traditional loans
- Risk of losing equity if default
- Limited financing availability
Seller financing can provide a path to ownership when buyers don’t qualify for other loans. Because the seller holds your mortgage, they may offer non-traditional options like low down payments and interest-only payments. Be sure to consult an attorney given the added legal considerations.
Evaluation Criteria for Land Loans
When evaluating lenders and loan programs, keep these key factors in mind:
- Interest rates and fees: Lower is better to save on financing costs
- Down payment requirements: Lower requirements increase affordability
- Credit score/income criteria: Ideal flexibility is 620+ FICO and verified income
- Construction standards: Loans allowing custom home building provide most flexibility
- Customer service: Responsive loan officers simplify the complex process
Carefully weighing these criteria helps identify affordable financing that fits your budget and plans. Consulting multiple lenders helps get the best deal.
Refinancing Land Loans
Once construction is complete, land loans can be refinanced into conventional mortgages. Refinancing to a traditional home loan lets borrowers enjoy better terms.
Benefits of refinancing include:
- Lower mortgage rates
- Lower monthly payments
- Flexible lengthy repayment terms
- Tax deductible interest
Work with lenders early in the construction process to allow time for refinancing. The home must receive an occupancy permit first.
Tips for Getting Approved
Since land loans carry more risk, borrowers need to go the extra mile to improve approval odds and get better rates. Here are handy tips:
- Get pre-qualified – Upfront proof of your finances helps
- Shop multiple lenders – Compare loan estimates to find the best fit option
- Optimize credit – Pay down debts and correct errors to boost your score
- Make a large down payment – 20-30% down helps reduce risk for lenders
- Detail construction plans – Provide bids, budgets, timelines and permits
The Bottom Line
Purchasing land is an ambitious goal requiring proper financing. While land loans charge higher rates and require excellent credit, they make owning your dream lot possible. Unique loan programs through USDA, SBA and others provide affordable financing options if you qualify. Seeking professional guidance is key to navigate the complex loan process and choose the optimal loan for your needs and financial situation.
Is Owning Land a Good Investment?
Owning land can be a good investment depending on the land, its location, and how you plan to use it. For example, a plot of ready-to-build land for a primary or secondary home has a different degree of risk than a piece of raw land intended for farming.
Boundaries
First off, it is essential to be clear on what the potential purchase entails. It is vital to get the boundaries marked by surveyors and have everything on paper ready to be presented to the lender. Another important detail is to double-check zoning and land use restrictions.
How to Get a Land Loan (And What to Know Before You Do)
FAQ
Which loan is best for buying land?
What are the best types of loans for land?
How hard is it to borrow money to buy land?
What is the lowest down payment for land?
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.
What is a loan for land purchase?
A **land loan** is a type of credit that is used to finance the purchase of a plot of land .It is a loan that is specifically designed for buying land, and it can be used to purchase raw land or land
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 type of loan should I take out when buying land?
The type of loan you take out will depend on where you’re buying land and how you intend to use the land. A land loan is sometimes confused with a construction loan, which is another type of loan often used by people looking to build a house.