Purchasing land to build a house or start a business can be an exciting endeavor. However, land is a major investment that requires proper financing. Many people wonder – can I get a loan for buying land? The answer is yes, you can get financing for land purchases through land loans. This article will explain everything you need to know about getting a loan to buy land.
What Is A Land Loan?
A land loan, also called a lot loan is a type of loan used to purchase a vacant plot of land. It works similarly to a traditional mortgage where the lender provides the funds to buy the land and the borrower pays back the loan amount plus interest over time.
Land loans allow buyers to finance raw land, unimproved land, or improved land. They can be used to purchase land for building a home, starting a business, or other development purposes Land loans have higher interest rates and larger down payments than mortgages since land itself does not act as collateral for the loan
Types Of Land Loans
There are three main types of land loans
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Raw land loans – For financing completely undeveloped land with no utilities or infrastructure. This option has the highest interest rates and down payment requirements.
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Unimproved land loans – For financing land that may have partial utilities or grading work but lacks full infrastructure access. Interest rates and down payments fall between raw land and improved land loan options.
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Improved land loans – For land with existing utility access and infrastructure in place. This option has the lowest interest rates and down payment requirements.
Land Loan Qualification Criteria
Banks and lenders have stricter qualification standards for land loans compared to home loans. Typical requirements include:
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Credit score – A minimum credit score of 680-720 is usually required. The higher your score, the better your loan terms will be.
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Down payment – Expect to make a down payment of at least 20-25%. More is better to get approved and reduce interest rates.
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Debt-to-income ratio – Your total monthly debts divided by gross monthly income should be below 43-50%.
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Loan purpose – Having a viable plan for the land shows lenders you can repay the loan.
Meeting these criteria gives you the best chance of land loan approval. Work on improving your credit, saving for a down payment, and developing land use plans before applying.
How To Get A Land Loan
You have several options when it comes to getting a land loan:
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Banks – Large national banks and local community banks both offer land loan programs. Rates at local banks may be more competitive.
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Credit unions – Like banks, credit unions provide land financing options. Focus your search locally.
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USDA loans – For rural properties, USDA provides subsidized land loans with favorable rates and terms.
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Seller financing – Some sellers may directly finance the land sale. This avoids bank qualification requirements.
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Home equity loan – Use equity from an existing home as collateral for a land loan.
Shop multiple lenders and compare interest rates, fees, loan terms, and eligibility criteria. Choose the land loan that best matches your financial situation.
The Land Loan Process
The basic process for obtaining a land loan is:
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Find the land – Research and select the land you want to buy. Confirm it aligns with your intended use.
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Apply for preapproval – Submit a loan application and documentation so the lender can preapprove you for a loan amount.
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Make an offer – With preapproval in place, you can negotiate and make an offer to purchase the land.
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Secure the loan – Once your offer is accepted, complete the full land loan application and approval process.
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Close on the loan – At closing, you’ll sign final loan documents and receive the funds to buy the land.
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Develop the land – Now you can start your land development plans!
Pros And Cons Of Land Loans
Land loans offer benefits but also have some drawbacks to consider:
Pros
- Finance land purchases and development plans
- Flexible loan terms and structures
- Build home or business on land you own
Cons
- Higher interest rates than mortgages
- Larger down payments required
- Risk of development delays or issues
- Less lender competition than home loans
Evaluate the advantages and disadvantages before committing to a land loan. Make sure it aligns with your financial situation and land goals.
Tips For Getting Approved
Follow these tips to improve your chances of successfully qualifying for a land loan:
- Have a down payment of 20% or more
- Ask sellers about owner financing if you can’t qualify for a land loan
- Seek loan preapproval to confirm affordability and loan amount
- Select improved land over raw land to reduce risk
- Highlight development plans showing a project timeline
- Build relationships with local bank and credit union lenders
- Work to increase your credit score above 720
- Lower your debt-to-income ratio below 50%
With proper preparation and persistence, you can get approved for a loan to buy land. Partner with lenders who understand your land goals and needs.
Alternatives To Financing Land
If you are unable to qualify for a land loan, consider these other options:
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Save up – Slowly saving up to buy land in cash avoids financing altogether.
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Investor partnerships – Team up with others to pool funds toward a land purchase.
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Crowdfunding – Use crowdfunding platforms to raise funds from multiple contributors.
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Lease-to-own – Lease the land first, then exercise a purchase option when ready to buy.
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Owner financing – Work with sellers willing to finance the sale themselves.
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Home equity – Tap available equity from an existing home as needed.
Some compromise and creativity can help cover a land purchase without financing. Weigh the pros and cons of each alternative to pick the right one for your situation.
The Bottom Line
Yes, you can absolutely get a loan for purchasing land if you select the right financing option for your needs. Land loans enable buying vacant property to build a residence or business with proper planning. Do your homework to understand land loan requirements and maximize your chances of approval. With persistence and preparation, you can make your land ownership dreams a reality.
Improvements Needed
Some land may not be ready to be developed. This might have been known at the time of purchase or only discovered later. Bear in mind that there is more risk involved with land that needs improvements as additional uncertainties may cause escalating prices or further complications related to development. The FDIC loan-to-value limit is 75% for land development, often requiring a deposit of up to 25%.
Future Zoning
It is also wise to check with the local planning department to determine what the future holds for the immediate neighborhood. A new park down the street can raise property values in the coming years, while a new highway or sewage treatment plant is less likely to do so.