Purchasing land to build a dream home or start a business is an exciting endeavor. However, land can be expensive, so financing may be necessary. The good news is, yes you can get a loan for land! Land loans, also called lot loans, allow buyers to purchase plots of raw, undeveloped land.
With some research and preparation you can secure financing to buy land. While loan options may be more limited than traditional mortgages land loans are available through lenders like banks, credit unions, and government agencies.
What is a Land Loan?
A land loan is specifically for financing the purchase of vacant land, whether raw undeveloped acreage or an improved lot ready for construction. Land loans share some similarities with traditional mortgages used to buy existing homes. However they also have some key differences.
Like mortgages, land loans:
- Are secured loans using the land as collateral
- Require a down payment
- Are repaid with interest over time in installments
Unlike standard home loans, land loans:
- Typically have higher interest rates
- Need larger down payments, often 20% or more
- Have shorter repayment terms of 1-5 years
- Don’t require immediate construction
Land loans give buyers time to finalize building plans or wait for the right time to develop the property. When ready to build, the land loan can be refinanced into a construction loan or mortgage.
What Types of Land Can Be Financed?
Not all vacant land is created equal when it comes to getting financing. Lenders categorize land into three types based on the current state of improvements. The type of land you want to buy will impact loan availability and terms.
Raw land has no infrastructure like roads, water/sewer access that make it easily buildable. Completely undeveloped raw land often requires a higher down payment and interest rate. Or lenders may not finance it at all.
Unimproved land has some infrastructure but still lacks utilities access. It may have had a structure on it in the past. Unimproved land can be financed with typically 25% down.
Improved land, the most buildable type, has paved road access and utilities available. Also called lots, improved land requires the lowest down payment of 15% or more.
What Do Lenders Look For?
Qualifying for a land loan is generally tougher than a standard mortgage. You’ll likely need:
- Down payment of 15% to 35%
- Credit score of at least 700
- Total debt-to-income ratio below 43%
The more improved the land, the lower your required down payment. Raw land needs the highest down payment and credit scores.
Lenders also want to see:
- Intended plans for the property
- Surveyed boundaries and land restrictions
- Confirmation that zoning allows your intended use
A detailed development plan highlighting preparations made shows lenders you’re serious about the project and lowers risk.
Where Can You Get Land Loans?
You have several options to get financing to purchase land:
Banks and Credit Unions – Many local and regional banks and credit unions offer land loans. Local lenders are a good place to start since they better understand the land values in the area.
Mortgage Lenders – Some national mortgage lenders offer land loan products. Be sure to ask potential lenders if they handle land financing.
Specialty Lenders – Farm credit organizations are one example of lenders specializing in land loans. They provide financing for agriculture properties.
Government Programs – FHA, USDA, and VA loans can potentially be used for land purchases in certain scenarios like building a primary residence.
Seller Financing – Some land sellers may be willing to finance the purchase directly. This can be an option when you can’t obtain a traditional land loan.
Shopping around helps find the best rates and terms for your specific land goals. A land loan pre-approval also strengthens your offer when you’re ready to make an offer on a property.
5 Options for Financing Land
Let’s explore some of the most common sources for financing land purchases:
1. Conventional Land Loans
Going directly to banks, credit unions, or other lenders for a standard land loan is likely the most common method. Rates and terms vary, so check with multiple providers for the best deals. Local lenders are worth prioritizing in your search.
2. FHA Land Loan
FHA land loans let buyers with lower credit scores access financing to purchase and prepare land for building a primary residence. The FHA requires a minimum down payment of just 3.5%.
However, there are limitations. The land can’t be left vacant indefinitely—you need firm plans to build and move in within 12 months. The property must also meet FHA building standards.
3. VA Land Loans
Veterans and active-duty service members have a couple options to buy land using VA home loans including:
VA Construction Loans – Allow buyers to finance buying and preparing land for building a primary residence that will eventually convert to a VA mortgage.
VA Farm Loans – Specifically finance agricultural land already improved with a residence.
VA loans require no down payment for qualifying applicants.
4. USDA Land Loans
For low-to-moderate income buyers seeking land in USDA-eligible rural locations, USDA land loans are an option. USDA loans can finance vacant land intended for building a primary residence. These loans have subsidized low interest rates but a short 5-year repayment term.
5. Home Equity Financing
Existing homeowners with substantial tappable home equity can leverage it to buy land in two ways:
Home Equity Loan – Offers a lump sum to use to purchase land outright or make a land loan down payment.
HELOC – Provides a revolving line of credit to draw from as needed for a land purchase.
Home equity financing lets approved borrowers access funds without having to sell their home.
Pros and Cons of Land Loans
Land loans provide a means to purchase raw land for future development but aren’t without some drawbacks to consider:
Pros
- Build your dream home custom-designed for you
- Buy land at today’s prices to build later
- Avoid paying closing costs twice by using single-close construction loans
- Diversify investment assets through land ownership
Cons
- Higher lending standards make approval difficult
- Short repayment terms mean no long-term financing
- Vacant land can be hard to resell if needed
- Land may end up not being suitable for building
- Complex process with less guidance than buying an existing home
In the end, land loans open doors for real estate investors and potential homeowners wanting to build their ideal properties. By understanding the loan process, researching lenders, and improving your credit profile, you can successfully get a loan to purchase land.
FAQs about Land Loans
How much does land cost?
Land prices vary tremendously based on location. Nationwide, the median vacant residential lot value is around $27,000. Raw rural acreage can sell for $2,000 – $5,000 per acre or higher. Land in or near metro areas sells for much more.
How do you buy land with no money?
Coming up with the down payment is one of the biggest hurdles for land buyers short on cash. Options besides standard land loan down payments include:
- Negotiate seller financing requiring little or no down payment
- Investors may offer partnerships with small or no initial investment
- Crowdfunding campaigns to raise down payment funds
Can you get a mortgage for land?
You cannot get a traditional 30-year fixed-rate mortgage strictly to purchase vacant land. However, land loans function similarly but with different terms tailored for undeveloped land. Construction loans and mortgages can finance land tied to building a residence.
How much do banks finance land?
Most lenders finance maximum 75% to 85% of improved land value. They want buyers to contribute 15% to 25% down to limit risk. Financing levels for raw rural land can be lower, sometimes 50% loan-to-value or less.
Can you build a house without a mortgage?
Building without financing is extremely challenging. Options besides mortgages and construction loans include:
- Paying cash from savings
- Seller financing
- Personal loans using other assets as collateral
- Crowdfunding/hard money loans
Very few people can pay cash for land, construction, and materials costing $200K+ to build a home.
Ready to Buy Land?
While vacant land requires some extra effort to finance, you have options to make your property dreams a reality. Taking the time to boost your credit score and savings for a sizable down payment will go a long way to getting approved. Partnering with an experienced real estate agent can help target the right loan programs and land opportunities in your local market.
Speculative Investment
Finally, there is raw land with no specific plans for any development. This would be considered a speculative investment.
For example, this could involve buying land in anticipation of the completion of a new freeway nearby. The hope would be that when the freeway is completed, the land would be attractive to a developer who wants to build a new subdivision with a convenient commute into the city. The land could then be sold to the developer for a tidy profit. Although the FDIC loan-to-value limit is 65%, lenders may feel compelled to require down payments greater than 35%.
Unimproved lots are ones that do not have basic required services such as water lines, electricity lines, or access to public roads. With such lots, it is common to run into unforeseen problems and cost overruns, which can add months to the purchase time line.
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.