The Best Place to Get a Loan for Land – A Complete Guide

Buying land to build your dream home on can be an exciting prospect However, land loans work differently than regular mortgages, so it’s important to find the right lender In this comprehensive guide, we’ll walk you through everything you need to know to find the best place to get a loan for land.

What is a Land Loan?

A land loan, also known as a lot loan, is financing specifically for purchasing a plot of land. These loans help borrowers secure land they plan to build on in the future.

Land loans are different from construction loans, which provide financing for building a home. With a land loan, you are only purchasing the property itself.

Benefits of Getting a Land Loan

There are several key benefits to securing a land loan rather than paying cash upfront

• Lock in lower land prices – Land prices tend to increase over time. A land loan allows you to purchase the property when prices are still affordable.

• Build on your timeline – With a land loan, you can purchase the lot now and start construction whenever you’re ready. There’s no pressure to build right away.

• Use land as collateral – In some cases, you may be able to use the land as collateral when applying for a construction loan later.

• Potentially lower down payment – Land loans may require lower down payments than paying all cash upfront. This improves affordability.

Types of Land Loans

There are a few main types of land loans to be aware of:

• Raw land loans – For purchasing completely undeveloped land with no utilities or infrastructure. Typically requires 20% or more down and good credit.

• Unimproved land loans – The land has some basic infrastructure like roads but no utilities. Down payment is usually over 20% with good credit needed.

• Improved land loans – The land is development-ready with roads, utilities, etc. Easier to qualify for than raw or unimproved land loans.

What Do Lenders Look For?

When applying for a land loan, there are a few key criteria lenders will evaluate:

• Credit score – A minimum score of 660 is usually required, but scores of 720+ are ideal and may qualify you for better rates.

• Down payment – Expect to put down 20-25% or more on raw or unimproved land. Can be lower for improved land.

• Debt-to-income ratio – Lenders want to see you can afford the loan payment plus your other debts. Aim for 36% DTI or lower.

• Intended land use – Having a solid plan for how you will develop the land makes lenders more confident in lending to you.

• Loan amount – Most land loans fall in the range of $50,000 to $500,000. Higher amounts may be possible with excellent credit.

Where to Get a Land Loan

Now that you understand the basics of land loans, where should you go to get one? Here are some of the best options:

Local Banks and Credit Unions

• Many local community banks and credit unions offer land loans, especially in rural areas where land purchases are common.

• Local lenders are familiar with land values in the area, making it easier to qualify and determine reasonable loan amounts.

• Good option for raw or unimproved land loans, which larger lenders may not provide.

Online Lenders

• Online lenders like LendingTree provide a fast and easy way to compare land loan rates and terms from multiple lenders.

• May offer better rates than local banks if you have excellent credit and substantial income.

• Most suited for improved land loans or simpler raw land purchases.

USDA Loans

• U.S. Department of Agriculture (USDA) loans help low-to-moderate income buyers in rural areas finance land purchases.

• USDA loans offer competitive rates and sometimes no down payment options.

• Limited availability based on location, income limits, and other eligibility criteria.

Farm Credit System Institutions

• Specialize in loans for agricultural properties including farms, ranches and other rural lands.

• Understand needs of rural borrowers planning to use land for agricultural purposes.

• Offer programs for raw, unimproved, and improved land.

• Must meet eligibility requirements related to how the land will be used.

SBA Loans

• U.S. Small Business Administration (SBA) 504 loans provide financing for purchasing land for commercial use.

• Long repayment terms of 10-25 years are available.

• Rates and terms vary based on specifics of the land purchase.

• Must meet SBA eligibility criteria and demonstrate how the land will be used by your business.

Tips for Finding the Best Land Loan

• Shop around and get quotes from multiple lenders to find the best rates and terms. Be sure to compare fees too.

• Look for lenders familiar with land values in the specific area where you are buying.

• Ask about discounts for automatic payments or interest rate reductions over time.

• Aim for fixed rates when possible to protect yourself from rising interest rates.

• Work to improve your credit score and save for a larger down payment in order to qualify for better loan offers.

• Read all loan documents carefully and understand any conditions around development, timelines, etc.

Alternatives to Land Loans

In some cases, a land loan may not be the right fit. Here are a few alternative financing options to consider:

• Home equity loan – Tap equity in your current home if available. No land to use as collateral required.

• Seller financing – Seller carries the mortgage. No bank qualification needed but terms vary greatly.

• Crowdfunding – Pool small investments from a large number of people. Unproven option but growing in use.

• Hard money loans – Asset-based lending from private investors at higher rates for short terms.

• Business loan – If purchasing for commercial use, a small business loan may be an option.

• Cash payment – If you can pay with cash savings, you avoid the need to qualify for financing. But it ties up capital that may work harder for you invested elsewhere.

Key Takeaways

Finding the right place to get a land loan requires research and comparison shopping. Local banks and credit unions are a good starting point, especially for rural properties. Online lenders may offer better rates if you have strong credit and income. Government programs through USDA and SBA are options depending on eligibility. Improving your credit, saving for a sizable down payment, and clearly communicating your plans for the land will help you secure favorable loan terms. With the right financing, you’ll be ready to purchase your ideal property and start building your dream home.