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If you want to build a house or a commercial property, a land loan can help you secure a location. However, land loans are considered risky investments for lenders because there’s no property to serve as collateral. That means they may be harder to find and qualify for than a conventional mortgage or a business loan.
Buying land to build a home or start a business can be an exciting endeavor. However, land is one of the few major purchases that usually can’t be financed with a traditional mortgage or small business loan. That’s where land loans, also known as lot loans, come in.
Land loans allow buyers to finance the purchase of vacant land. These specialty loans are offered by some banks credit unions, mortgage lenders and the U.S. Department of Agriculture (USDA).
If you’re considering purchasing a plot of land, it’s important to understand the different types of land loans available and how to qualify for financing. This guide provides an overview of land loan options, pros and cons, qualification requirements and where to find lenders.
What is a Land Loan?
A land loan is a loan used specifically to purchase vacant land. The property may be raw land with no utilities or infrastructure, partially developed land with some improvements like gravel road access, or fully improved land ready for construction.
Land loans can finance land intended for
- Residential use to build a primary home or vacation property
- Agricultural use for farming or ranching
- Commercial use to build retail, office or industrial buildings
The loan provides financing to buy the land only. Once you own the land, you may get a separate construction loan to pay for building costs. Or you can build over time as you save or pay cash. Some land loans can be refinanced into a traditional mortgage after you finish construction.
Types of Land Loans
There are several types of financing available for vacant land purchases:
Raw Land Loans
Raw land has no infrastructure in place. It may not have road access, electricity, water wells or sewer. This type of land requires the most work to develop but is generally the most affordable option.
Raw land loans typically require 20% to 50% down and have higher interest rates than improved land loans. Loan terms are usually shorter too, around 5 to 15 years.
Unimproved Land Loans
Unimproved land is partially developed but still lacks some basics like utility hookups or paved road access. An unimproved land loan can finance this type of partially developed land.
This option offers more value than raw land since some infrastructure already exists. Loan terms may be more favorable as a result, with down payments as low as 10% and longer repayment periods.
Improved Land Loans
Improved land is fully developed with all necessary infrastructure in place like electricity, water, sewer and telephone and internet service. It’s ready for construction.
Since improved land is move-in ready, it costs more than raw or unimproved land. But improved land loans offer better terms, including lower down payments around 10%, longer repayment periods of 15 to 30 years, and lower interest rates.
Land Loan Qualification Requirements
Land loans have stricter eligibility standards than a typical mortgage since the lender has no home or building as collateral until construction is complete. Typical requirements include:
- Credit score: 720 or higher
- Down payment: 10% to 50%
- Income: Stable income and a low debt-to-income ratio
- Land usage plan: Proof of how you intend to use the land
Specific requirements vary by lender. Local banks or credit unions may offer more flexible qualifying criteria than a national mortgage lender.
Where to Get a Land Loan
You can find land loans from several sources:
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Local banks and credit unions: More likely to finance vacant land than big banks
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Mortgage lenders: Some national lenders offer land loan programs
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USDA: Offers land loans for moderate-income buyers in rural areas
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SBA: For commercially zoned land to start or expand a small business
Shop around and compare rates and terms from multiple lenders. Consider getting prequalified to confirm how much you can borrow before making an offer on land.
Pros and Cons of Land Loans
Land loans offer benefits but also pose some risks to understand before applying:
Pros
- Build a custom home or business on land you own
- Potential to refinance into a construction loan and mortgage
- No private mortgage insurance required
- Flexible for those not ready to build immediately
Cons
- Difficult to qualify for with stricter requirements
- Usually higher interest rates and large down payments
- Shorter repayment terms can mean high monthly payments
- Lack of collateral makes borrowing riskier
Alternatives to Land Loans
If you don’t qualify for a land loan, here are some other options for financing land:
- Seller financing: Buy directly from the seller with a land contract
- Home equity loan: Use equity in your current home as collateral
- Personal loan: Requires excellent credit and no collateral
- One-time close construction loans: Finance land purchase and building costs in a single USDA, FHA or VA loan
The best financing option depends on your credit score, finances, down payment amount and plans for the property. Speaking with a loan officer can help you determine the ideal loan type for your situation.
Should You Get a Land Loan?
Land loans allow buyers to purchase vacant land to hold for future development or build on right away. They offer more flexibility than alternatives like construction loans.
If you have strong credit, steady income, sufficient cash for a down payment and a solid plan for using the land, a land loan can help make your property ownership dreams achievable.
What Is a Land Loan?
A land loan, also called a lot loan, is used to finance the purchase of a plot of land for residential or commercial development purposes. The type of lot financed can be anything from raw land to a fully developed parcel. However, unlike a short-term construction loan, you don’t need to be ready to build to qualify for a land loan.
Land loans provide an alternative path to homeownership for borrowers who don’t want to purchase an existing property. They also allow entrepreneurs to expand or establish a business on land they own outright, versus pursuing a ground lease.
Cons of Land Loans
- Land loans can be hard to find because many lenders don’t offer them.
- Borrower qualifications are more stringent compared to those for a regular mortgage.
- You may face less favorable loan terms, such as higher interest rates and down payment requirements.
- Land loans typically have shorter repayment periods than a mortgage, increasing your monthly payment amount.
- They often include a balloon payment—a large one-time payment due at the end of the loan term.
How to Get a Land Loan (And What to Know Before You Do)
FAQ
What is the best type of loan for buying land?
What is the longest land loan you can get?
What is the lowest credit score for a land loan?
What is a land loan?
A land loan – sometimes referred to as a lot loan – is used to finance the purchase of a plot of land. You can take out a land loan if you’re interested in buying a piece of land to build a home or use for business purposes. The type of loan you take out will depend on where you’re buying land and how you intend to use the land.
Are there different types of land loans?
There are different types of land loans. But it’s the land rather than the loan that determines the differences. In other words, your loan is likely to be more costly and difficult to get as the land you want becomes increasingly challenging to develop.
What type of loan should I take out when buying land?
The type of loan you take out will depend on where you’re buying land and how you intend to use the land. A land loan is sometimes confused with a construction loan, which is another type of loan often used by people looking to build a house.
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 type of land is financed?
The type of lot financed can be anything from raw land to a fully developed parcel. However, unlike a short-term construction loan, you don’t need to be ready to build to qualify for a land loan. Land loans provide an alternative path to homeownership for borrowers who don’t want to purchase an existing property.
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.