Buying land to build your dream home or start a business can be an exciting prospect. However, land loans are more complex than regular mortgages. Lenders see land loans as riskier because there’s no property as collateral So how do you get approved for financing to purchase land? This comprehensive guide covers everything you need to know about obtaining a loan to buy land.
What Are Land Loans?
A land loan, also called a lot loan, is a loan used to buy a vacant plot of land. You can use a land loan to purchase land to build a home, farm, or for commercial use The type of land loan you get depends on factors like
- Location of the land
- Intended use
- If utilities and access are established
Land loans differ from construction loans, which provide financing to build a home right away. Land loans allow time to plan and develop the property before constructing anything.
Land Loan Types
There are 3 main types of land loans:
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Raw land loans – For completely undeveloped land with no utilities or road access. Have the highest interest rates and down payments.
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Unimproved land loans – Land has some utilities but lacks access to electricity, gas, etc. Down payments around 20%+.
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Improved land loans – Land has utilities and road access. Easiest to get with lowest rates.
The more developed the land, the better the loan terms will be.
How Do Land Loans Work?
The land loan process is similar to a mortgage. The lender provides financing to purchase the land, which you pay back over time with interest.
However, qualifying can be more difficult because land loans are riskier for lenders. Requirements may include:
- Credit score of 700+
- Detailed plans for the land
- Surveys, zoning info, utility access details
Interest rates are higher than mortgages but can be lowered with good credit and low debt-to-income ratio.
Land Loan Requirements
When applying for a land loan, lenders want to see:
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Land surveys – To establish exact property boundaries.
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Zoning research – Confirming land use regulations in the area.
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Utility access – Available water, sewer, electric, gas hookups.
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Road access – Does it border public roads? Permanent access easements?
Having these details ready makes lenders more confident in providing financing.
Planned Use Matters
How you plan to use the purchased land impacts your loan terms. Lower risk uses may get better rates.
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Build immediately – Lower risk than waiting years to develop.
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Land needs improvements – May require higher down payment if utilities, access need installing.
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Speculative investment – Buying raw land hoping value will increase. High risk so high rates/down payments.
Presenting a concrete plan for immediate development gives lenders confidence.
Alternative Land Loan Options
If traditional lenders reject your application, consider these alternative options:
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Seller financing – Negotiate a loan directly with the seller.
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Local lenders – Smaller local banks may be more flexible than big banks.
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USDA loans – For rural land, USDA offers subsidized loans with low rates.
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Home equity loan – Use equity from current home as collateral for better loan terms.
Shopping around with different lenders can help you find more agreeable financing.
Pros and Cons of Land Loans
Pros:
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Build your dream home or expand a business
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Affordable through USDA rural loans
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Ready lots can be cheaper than buying existing homes
Cons:
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Harder to qualify than regular mortgages
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Need surveys, zoning research to apply
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Short repayment periods
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Risk losing current home if used as collateral
Consider the tradeoffs to decide if pursuing a land loan fits your needs.
Steps to Getting a Land Loan
Follow these key steps when seeking a land loan:
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Find the right lender – Seek out banks experienced with land loans or alternative options.
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Research property details – Confirm boundaries, zoning, utilities.
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Prepare your loan application – Have credit history, income docs, property plans ready.
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Present your case – Explain intended property use, development timeline, finances.
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Shop around – If denied, try other lenders until you secure favorable terms.
With preparation and persistence, you can get approved to achieve your land ownership goals.
Common Land Loan Questions
Can I get a land loan for any property?
Not necessarily. Lenders look for land with established access, utilities, and low development costs. Remote raw land is highest risk.
What credit score is needed?
Most lenders want 700+ for land loans. Score of 720+ gives you best rates.
What should I research before applying?
Property boundaries, zoning regulations, utility access, road access. Details reassure lenders about viability.
What are land loan rates?
Usually 0.5 – 1% higher than mortgage rates since land loans are riskier. Rates also based on your credit/financial profile.
How much down payment is required?
Typically 20-25% down or more. Undeveloped land may need 25%+ down. Improved lots can be 15% down.
The Bottom Line
Securing financing for vacant land has extra challenges compared to a regular mortgage. With no existing property as collateral, land loans present more risk to lenders. Do your homework researching the property and present detailed development plans to improve your chances of getting approved. Shop around with different lenders to find the best loan terms. With preparation and persistence, you can achieve your dream of owning land.
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.
Build Immediately
The terms of the loans—such as down payment and interest rate—typically hinge on the intended use of the land since this is directly linked to the bank’s risk exposure. In this way, getting land loans is always trickier than buying an existing house since a current house gives the bank immediate, tangible collateral.
However, developing land immediately often has less risk than developing it later because fewer variables may arise to prevent development in the future.
The Federal Deposit Insurance Corp. (FDIC) has established lending policies for institutions regarding the loan-to-value limitations for land. All loan terms are up to each lender’s internal limits but should not exceed FDIC guidelines. Construction of a one- to four-family residence calls for a 15% down payment (or 85% loan-to-value limit).
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?
What kind of loan is used to purchase land?
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