Getting a land loan can be a great way to purchase a vacant plot of land to build your dream home or start a new business. With the right planning and preparation, getting approved for a land loan is very achievable if you meet the qualifications. In this comprehensive guide, we’ll walk you through everything you need to know about getting a land loan in 2023.
What Is A Land Loan?
A land loan, also known as a lot loan, is a type of financing used to purchase just land, without any existing structures on it. These loans allow you to buy a vacant plot of land now and build on it later.
Land loans work similarly to traditional mortgages in that they are secured by the land itself as collateral. You’ll make a down payment like you would with a home loan, then repay the remaining loan amount plus interest over a set repayment term.
The key differences are that land loans typically have higher interest rates, larger down payments, and shorter repayment terms of 2-5 years. At the end there is usually a large balloon payment.
Types Of Land Loans
There are a few main categories of land loans
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Raw land loans – For completely undeveloped land without any utilities or infrastructure. This option has the highest interest rates and down payment requirements.
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Unimproved land loans – The land may have some basic infrastructure but still lacks utilities access. Slightly better terms than raw land loans.
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Improved land loans – Land that is development-ready with road access and availability of water, electric, sewer, etc. Easiest type to get approved for.
The more improved and developable the land, the better rates and terms you can qualify for
Land Loan Requirements
Qualifying for a land loan is more challenging than a traditional mortgage. Here are typical requirements:
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Down payment – Usually 15-35% down minimum, depending on land type. The more you put down, the better.
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Credit score – Minimum of 680-700+ recommended, though requirements vary by lender. The higher your score, the better your chances.
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Debt-to-income ratio – Your total monthly debt payments, including the land loan, should not exceed 43% of your gross monthly income.
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Loan term – Most land loans have shorter 2-5 year repayment terms. Be prepared for a large balloon payment.
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Intended use – Most lenders require you to state how you intend to use the land as they view vacant land as riskier.
How To Get A Land Loan
If you meet the qualifications, here are some options for getting a land loan:
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Local banks/credit unions – Community-focused lenders are often the best place to find land loan programs. Ask about options in your area.
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Farm credit organizations – These institutions specialize in loans for agriculture and farms, including farmland purchases.
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Mortgage brokers – An experienced broker can shop your application around to find you the best land loan rates and terms.
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Federal loan programs – The USDA and SBA offer land loan programs for certain borrowers, such as rural residents or small businesses.
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Home equity loan – If you have significant home equity, you may be able to qualify for a home equity loan or HELOC to purchase land.
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Land contract – Also called seller financing, you work directly with the land seller to purchase through a land contract, bypassing banks.
Tips For Getting Approved
Follow these tips to boost your chances of land loan approval:
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Shop around – Apply to multiple lenders and compare options to find the best rates/terms. Get pre-qualified before making offers.
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Ask about exceptions – See if the lender can make exceptions on large down payments or credit scores for strong applicants.
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Highlight site viability – Provide zoning records, site plans, surveys etc to show the land is development-ready.
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Leverage equity – If needed, use home equity to cover the down payment requirement.
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Make a large down payment – Put down 30% or more if you can to get the best rates and quicker approval.
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Improve your credit – Work on improving your score and lowering debts. Even small boosts can help.
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Bring a strong plan – Provide detailed construction plans, budgets, and timelines to show you are committed to developing the land.
What To Expect After Approval
Once approved, you will close on the land loan similarly to a mortgage:
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Make your down payment to the title company.
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Sign the loan documents and land title is transferred to you.
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Start making your monthly payments to repay the loan principal plus interest.
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Near the end of the short 2-5 year term, prepare to make the large balloon payment or look to refinance.
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If building, get your construction loan or mortgage lined up to be ready to start building.
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Follow through on your plans for the land as outlined in the loan application! Failing to do so may put you in default.
Alternatives To Look Into
Though getting a land loan is possible with proper preparation, make sure to also consider these other options:
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Traditional mortgage – If buying land with an existing house or other inhabitable dwelling, you may qualify for a standard home purchase mortgage loan instead.
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Construction loan – These combine the land purchase with construction financing in one loan. Requirements are similar to land loans.
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Owner financing – The property seller finances the purchase directly through a land contract sale agreement.
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All cash purchase – If you have liquid funds on hand, buying land outright in cash provides the most flexibility and control. Just ensure it aligns with your overall financial plan first.
Is A Land Loan Right For You?
Purchasing vacant land can be fulfilling if you intend to develop it over time. With proper planning and preparation, getting a land loan approval is very doable. Be sure to choose the right financing path for your needs. If going the land loan route, give yourself plenty of time to shop around, improve your credit, and make a compelling application.
Home Equity Loan
A buyer with existing property and little debt may want to consider a home equity loan. This type of loan taps the equity of the existing property, granting much better terms than any regular construction or land loan.
How Do Land Loans Work?
In general, a land loan works similarly to a standard mortgage. If you are approved for this type of loan, your lender will provide you with funds to buy your chosen lot of land. You will then pay them back, with interest, over the following years.
However, qualifying for a land loan can be more difficult than getting a regular mortgage because it is riskier for lenders. As a result, borrowers may have to prove that they have a good credit score (700 or above), and will have to explain what they intend to use the land for.
Borrowers should also highlight aspects of the property that need to be checked, like zoning, land use restrictions, surveyed boundaries, and access to utilities. These factors will give lenders an idea of how risky the loan might be.
Once all factors have been taken into consideration, the rates and other terms of the land loan can be issued. Land loan interest rates tend to be higher than standard mortgage interest rates, but a good credit score and low debt-to-income ratio can lower the cost.
How to Get a Land Loan (And What to Know Before You Do)
FAQ
How hard is it to borrow money to buy land?
Which loan is best for buying land?
Can you get a loan to buy land in Texas?
What are current land loan rates in Texas?
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Term
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Rate
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APR*
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5 Year
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6.25%
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6.89%
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10 Year
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6.50%
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6.85%
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15 Year
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6.50%
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6.75%
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Minimum Loan Amount is $15,000 Required Down Payment is 20%
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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.
How do I apply for a land loan?
The first step to applying for a land loan may be locating the right lender for your purchase. Not all lenders offer land loans, but plenty are out there. A local credit union might be a good fit if you are going to work to develop land in your community.
How do I finance a land purchase?
The more improved the land, the lower your required down payment and borrowing costs will be. 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.
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.