Buying a piece of land to build a house or start a business on is an exciting prospect. However most people can’t afford to pay cash for raw land. That’s where land loans come in.
What is a Land Loan?
A land loan, also called a lot loan, is a loan used to purchase a vacant plot of land Land loans are offered by banks, credit unions, government lending programs, and private lenders. They allow you to spread out the cost of the land over several years
Land loans work similarly to traditional mortgages in that you’ll make a down payment upfront and then make monthly payments over a set repayment term. However, land loans have some key differences:
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Higher interest rates – Land is riskier for lenders than a developed property, so expect to pay a higher interest rate. Rates for land loans typically range from 8% to 15%.
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Shorter terms – Land loan terms are generally 2 to 5 years. You’ll have a large balloon payment at the end.
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Higher down payments – Expect to put down at least 20% to 35% for a land loan. Some lenders may require up to 50%. Improved land needs the smallest down payment.
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Stricter credit requirements – Most lenders want to see a minimum credit score around 700 to qualify.
Types of Land You Can Get a Loan For
Not all land is created equal when it comes to getting financing. Lenders classify land into three categories:
- Raw land – Completely undeveloped with no access to utilities or roads
- Unimproved land – May have limited infrastructure but lacks utilities
- Improved land – Has access to utilities and roads
Raw land is the hardest type to get a loan for, while improved land is the easiest. Make sure the land you want to buy matches the type of loan you apply for.
Where to Get a Land Loan
You have several options for financing land:
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Banks – Local banks are a good place to start your search, especially community banks. Credit unions also offer land loans.
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Online lenders – Online-only lenders like LendingTree provide land loans nationwide. Rates may be higher.
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Federal lending programs – The USDA, FHA, and VA all offer land loans under certain circumstances. These loans have buyer protections.
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Private lenders – Specialty finance companies offer land loans at higher rates. Try this if you have difficulty qualifying at a bank.
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Seller financing – Some sellers provide their own financing. This avoids bank qualifying but may have high rates.
Shop around with multiple lenders to find the best rate and terms for your situation.
What Do Lenders Look For?
Land loans are riskier for lenders than home loans. Expect an extensive approval process looking at:
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Credit score – Most lenders require excellent credit, around 700+ score. Some may accept 660+ scores with a higher down payment.
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Down payment – Typically 20% to 50% of the purchase price. More for raw land, less for improved land.
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Debt-to-income ratio – Your total monthly debts compared to income. Must be below 43% in most cases.
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Loan purpose – Lenders want to see you have a solid plan for using the land.
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Collateral – You may need to pledge additional collateral if the land lacks improvements.
Come prepared with a strong application and plan for the land if you want to get approved.
Pros and Cons of Land Loans
Land loans allow you to buy land now and pay it off over time. But are they the right choice? Consider the pros and cons:
Pros
- Pay for land over time instead of paying cash upfront
- Lock in purchase of land for the future
- Interest and property taxes may be tax deductible
Cons
- Higher interest rates than traditional loans
- Large down payment required
- Short repayment terms with balloon payment
- Risk losing land if you default on the loan
- Stricter lender requirements compared to home loans
In the end, land loans provide a way to finance vacant land if you understand the costs and risks involved.
Common Questions about Land Loans
If you’re considering a land loan, you probably have some questions. Here are answers to a few common ones:
Can I get a land loan for any type of land?
You can get a loan for raw, unimproved, or improved land. But loans are more difficult to qualify for on raw, undeveloped land.
How much money do I need for a down payment?
Down payment requirements vary by lender but typically range from 20% to 50% of the purchase price. More for raw land, less for improved land.
What credit score do I need?
Most lenders want to see at least a 700 credit score. Some may accept 660+ with a larger down payment. An excellent score improves your chances.
Should I use a land loan or home construction loan?
If you plan to build on the land soon, a construction loan may be a better option. Land loans don’t require immediate construction.
Can I get an FHA or USDA land loan?
Yes, the FHA and USDA offer land loans under certain circumstances if you meet their eligibility rules. These loans are for primary residences.
How long do I have to repay a land loan?
Repayment terms on land loans are usually between 2 to 5 years. You’ll have a large balloon payment at the end to pay off the balance.
The Bottom Line
While getting a loan for vacant land can be challenging, land loans make it possible to buy and pay off land over time. Understand the costs and strict lender requirements before applying. And be sure you have a firm plan for how you intend to use the land. With the right preparation, you can get approved for the land loan you need to start building your dream home or business.
Access
For residential lots, access to utilities is a significant factor. Having water, sewer, electricity, and cable hookups ready to go saves a lot of time, money, and hassle. Similarly, public road access can be significant since the buyer will have to secure a permanent easement to access a public road if one is not already available.
Because buying land is different from purchasing a home, it’s a good idea to work with a real estate agent who specializes in land purchase transactions or construction loans.
Other Land Loan Financing Options
Given the above challenges, you may want or need to search further to find more acceptable terms to finance your land purchase. Here are a few resources that you can investigate.