How Long Are Land Loans? Everything You Need To Know

If you’re considering purchasing a vacant plot of land you may be wondering – how long are land loans typically? Unlike traditional mortgages used to purchase existing homes, land loans have much shorter repayment terms. In this comprehensive guide, we’ll explain everything you need to know about land loans including how they work, their duration, and how to qualify.

What Exactly Are Land Loans?

A land loan, also known as a lot loan, allows you to finance the purchase of vacant land that doesn’t yet have any structures built on it. Land loans are secured loans, meaning the land itself serves as collateral.

Land loans are different from construction loans and traditional home loans, It’s important not to confuse the three

<table><thead><tr><th></th> <th>Land Loan</th><th>Home Loan</th></tr> </thead><tbody><tr><td>Purpose</td><td>Purchase vacant land to build a new home someday, or to purchase land for recreational use</td> <td>Purchase an existing home</td></tr><tr> <td>Term</td><td>Up to 15 years</td><td>Up to 30 years</td></tr></tbody></table>

The main differences come down to purpose and term length. Now let’s look at the duration of land loans in more detail.

Land Loan Terms

One of the biggest differences between a land loan and a traditional mortgage is the loan term. While home loans typically have 15 or 30 year repayment terms, land loans are much shorter

• Raw land loans – 1 to 5 years
• Unimproved land loans – 1 to 10 years
• Improved land loans – 1 to 15 years

The type of land you’re purchasing affects the maximum term length you can receive. Raw land has no development or access to utilities. Unimproved land may have limited improvements like an old structure or partial utility access. Improved land is the most developed option, with full access to utilities and roads.

Banks offer shorter terms on land loans because they are seen as higher risk. With no existing structures or income generated by the land, lenders have less assurance you will repay the loan.

The short duration helps mitigate the lender’s risk. You’ll need to refinance or pay off the land loan once you are ready to build on the property.

Land Loan Payments

Not only are repayment terms much shorter, but land loan payments also work a bit differently than home mortgages:

• Interest-only – During the term of the loan, you only pay the interest charges each month. You do not pay down the principal balance.
• Balloon payment – At the end of the loan term, you must make one large “balloon” payment to pay off the entire remaining principal balance.

This structure allows you to purchase the land now at a lower monthly cost, while giving you time to prepare for the full payoff several years later. Just make sure you are prepared to make that big final balloon payment when it comes due.

Getting Preapproved for a Land Loan

Preapproval is an important early step when applying for a land loan. Going through preapproval allows you to confirm the loan amount and terms for which you qualify before you start seriously looking for land.

Here are some typical land loan requirements:

• Down payment – 20-35%
• Credit score – 650 minimum, 720+ ideal
• Debt-to-income ratio – Below 43%
• Loan use – Must state plans for the land, like building a home

Come prepared with a full budget for the land purchase and future building plans when you apply. This will help demonstrate you can afford the property and have a feasible plan.

Where To Get Land Loans

You may think a land loan sounds ideal for purchasing your dream property, but not every lender provides them. Here are some options to consider:

• Local banks and credit unions – Community lenders are most familiar with land values in the area, making them a good first stop.

• Farm Credit institutions – These nonprofit lenders specialize in loans for agricultural properties.

• Online lenders – Companies like LendingTree offer an online marketplace to compare land loan offers.

• Government programs – The USDA and VA offer land loan programs in certain scenarios, like building a primary residence.

Shop around to find the best rates, terms, fees, and customer service. Once you select a lender, you can move forward with formally applying and closing on your dream land purchase.

The Pros and Cons

As with any loan, there are both advantages and disadvantages to take into account with a land loan:

Pros

• Finance land purchase and build on your schedule

• Usually lower down payment than cash purchase

• Only pay interest during term before principal balloon payment

Cons

• Short repayment terms with balloon payment

• Higher rates than traditional mortgages

• Need construction loan once ready to build

Make sure you fully understand the shorter duration, interest-only payments, balloon payment, and higher rates associated with a land loan before moving forward.

Our Final Take

Now you know the answer to “how long are land loans?” – typically 1 to 15 years, depending on the type of land purchased. While short, this term length can give you the flexibility to buy land now and prepare for future construction. Just be realistic about your budget and ability to repay the full balloon payment when it comes due. With proper planning, a land loan can be a great way to fulfill your property ownership dreams over time.