Buying land to build your dream home can be an exciting prospect. Having a blank canvas to create your perfect living space is appealing to many prospective homeowners. However, land itself can be quite expensive, especially once you factor in the cost to build. This is where a conventional land loan can help make your dreams of custom building a home a reality.
In this article, I’ll explain what a conventional land loan is, who offers these types of loans, eligibility requirements, the process of securing financing, pros and cons, and alternatives if you don’t qualify for a conventional loan.
What is a Conventional Land Loan?
A conventional land loan, also sometimes called a lot loan, is financing that allows you to purchase a plot of land without requiring immediate plans to build on it. These loans are offered by private lenders like banks and credit unions. They are not part of government programs like FHA, VA, or USDA loans.
Conventional lending has more flexible qualifying guidelines than government programs, but conventional land loans also tend to have higher interest rates.
Who Offers Conventional Land Loans?
You can find conventional land loans through:
- Local banks and credit unions
- Online lenders and mortgage brokers
- Farm Credit lenders
- Specialty land loan lenders
Work with lenders familiar with land values and development plans in your area Local lenders will have the best understanding of what types of projects are viable
Conventional Land Loan Requirements
It’s more difficult to qualify for a conventional land loan than a traditional mortgage since the lender doesn’t have a completed home as collateral. Expect the following general requirements:
- Down payment of at least 15% – 35%
- Raw land requires the highest down payment
- Improved land ready to build on requires the lowest
- Credit score of at least 700
- Debt-to-income ratio below 43%
- Solid plans for the land and a timeline to build
- Recent appraisal of the land’s value
Requirements can vary significantly between lenders Shop around to find the most favorable terms you qualify for
The Conventional Land Loan Process
The process of getting approved for and closing on a conventional land loan mirrors that of a purchase mortgage
1. Get pre-approved
Work with a lender to get pre-approved before making an offer. This shows sellers you can afford the purchase and makes your offer stronger.
2. Make an offer and negotiate terms
Make an offer once you find land you want to purchase. Hire a real estate attorney to help negotiate the purchase agreement terms.
3. Complete the full loan application
After an offer is accepted, complete the full application and provide documents to verify your income, assets, and overall financial picture.
4. Appraisal and underwriting
The lender will order an appraisal to confirm the land’s value supports the purchase price. Underwriting will analyze your full application against the lender’s requirements.
5. Closing
During closing, you’ll finalize the land loan, make your down payment, and receive the property deed.
Pros of a Conventional Land Loan
Conventional land loans offer several advantages:
- Wider availability than government programs
- Lower down payments than required for cash purchase
- Lock in purchase price while taking time to finalize building plans
- Make gradual payments over loan term rather than large lump sum
- Potentially deduct mortgage interest on taxes (consult a tax pro)
Cons of a Conventional Land Loan
There are also some potential disadvantages:
- Higher interest rates than traditional mortgages
- Stricter qualifying criteria than standard home loans
- Short repayment terms of 2 – 5 years
- Potential prepayment penalties if paying off early
- Loss of property if unable to repay the loan
Alternatives if You Don’t Qualify
If you don’t qualify for a conventional land loan, here are some other options to consider:
Home Equity Loan – Tap equity from an existing home if you have significant built up.
USDA Loan – For building in eligible rural locations. Offers 0% down payment options.
Seller Financing – Some sellers may finance a land sale directly.
Crowdfunding – Crowdfund a down payment through peer-to-peer lending.
Save and Pay Cash – Slowly build savings and make a future cash purchase.
The Bottom Line
Conventional loans allow buyers flexibility in financing land purchases without immediate build plans. While qualification is stringent, they are more widely available than niche programs. Conventional lending works for many land buyers who can meet down payment, credit, and income requirements.
The Credit and Financing Process
The credit and financing process of buying land with a conventional loan is similar to that of other types of loans. Generally, prospective buyers will have to document their income, assets, job history and other financial information. They must also have a good credit score in order for the lender to approve the loan. Most lenders require a minimum credit score of 620 for approval and may require additional factors such as down payments or additional collateral.
For buyers who do not meet these requirements, alternative financing options such as seller financing or adjustable rate mortgages may be available. However, buyers should consider the pros and cons of these alternatives before making any commitment. Seller financing often offers lower interest rates than conventional loans, but it also comes with a greater amount of risk since there are no guarantees that the buyer will be able to repay the loan. The same goes for adjustable-rate mortgages where interest rates may change over time, meaning buyers could end up paying more in the long run.
When deciding on a loan type and discussing terms with lenders, you should weigh all options carefully to ensure that you are getting the best possible deal. With so many options available in today’s market, it can take some research to find the right mortgage product for your needs. It is important to remember that regardless of what loan type you choose, meeting credit and financing requirements are essential for homebuyers looking to purchase land with a conventional loan. By understanding what’s required during the process, buyers can make informed decisions when it comes time to close on their new home purchase — whether it be on land or not.
Ultimately, by working with an experienced mortgage broker or lender and following all of the necessary steps, buyers should find themselves closer to owning a piece of land with a conventional loan. By keeping an eye out for fees associated with closing costs such as taxes, title insurance and inspections fees, buyers can better plan for their total expenses when it comes time to buy. Wandering through this process can seem intimidating but with the right knowledge and guidance you can make an informed decision that sets you up set you up well into the future. Now it’s time to consider two key aspects at play when buying land: important terms & fees — let’s look closer now at each term and how they impact your bottom line while purchasing land.
Can You Use A Conventional Loan to Buy Land?
Using a conventional loan to buy land can be a beneficial option if you have good credit and low debt-to-income (DTI) ratio. Low mortgage rates, a long window of repayment and no large down payment are some of the benefits of using this type of loan to finance your land purchase. However, lenders may be hesitant to approve such loans due to the lack of collateral inherent in owning vacant land, so the borrower must have excellent credit and the ability to show proof of steady income.
In addition, it is important for borrowers to verify that the land qualifies for a conventional loan under their lender’s guidelines. This may include confirming whether or not the land is suitable for development such as farming or housing divisions and that there are no conservation restrictions on the property. The size of the parcel will also effect eligibility depending on the lender, since some limit how much acreage can be financed through conventional loans.
Overall, it is possible to use a conventional loan to buy land but there are many factors that need to be taken into consideration before applying. Therefore, reviewing all elements involved in obtaining financing is essential prior to making a final decision so potential borrowers understand what they are getting themselves into. As you review all resources available and come to a conclusion on which loan is right for you, let us shift our focus onto the credit and financing process which should provide further insight into taking this path towards acquiring land.
- According to the Consumer Financial Protection Bureau, most lenders usually require borrowers to make down payments of between 10-20% when taking out a conventional loan for land.
- Mortgage lenders may require applicants for a conventional loan to have a credit score of at least 620 in order to be approved.
- Borrowers may also need to provide proof of income, an appraisal of the property value, sufficient home insurance and other documents when taking out a conventional loan to buy land.
How to Get a Land Loan (And What to Know Before You Do)
FAQ
Which loan is best for buying land?
What kind of loan is used to purchase land?
Is a land loan the same as a mortgage?
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 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 makes a good land loan?
The purpose and current use of the land can dictate the terms of the loan. Unimproved “raw” land is usually the hardest to finance or get with favorable terms. Lenders consider raw land as the least desirable collateral for all land uses. Most will require more money down (up to 50 percent) and charge a much higher interest rate.
Where can I get a land loan?
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. Typically, the more developed the property, the lower the down payment you’ll need.