How Long is a Land Loan? Everything You Need to Know

Land loans allow buyers to purchase vacant land to either build a home on in the future or use recreationally They are an alternative financing option for those who want to own land without taking out a traditional home loan But how long do land loans typically last? Let’s take a closer look.

What is a Land Loan?

A land loan, also called a lot loan is specifically for purchasing vacant land – not an existing home. These loans provide financing to buy raw land to eventually build on or improved land for recreation.

Land loans should not be confused with construction loans or traditional home loans

• Land Loan – Purchase vacant land to build a new home someday, or to purchase land for recreational use

• Home Loan – Purchase an existing home

So if you want to buy vacant land now but don’t have plans to build soon, a land loan allows you to secure financing without the construction requirements of a home loan.

Land Loan Term Lengths

Land loans typically have shorter repayment terms than home loans. While a traditional 30-year fixed-rate mortgage is common for home buying, land loan terms are much shorter:

• 1-5 years – Many land loans have terms of just 1-5 years. This short time frame helps mitigate the risk of lending for vacant land.

• 5-10 years – Some land loan lenders offer slightly longer terms of 5-10 years. This gives borrowers more time to repay the loan.

• 10-15 years – Land loans over 10 years are less common but can sometimes be found. A 15-year land loan provides lower monthly payments but comes with higher interest rates.

So while home loans stretch out for decades, land financing tends to be much quicker – often just several years.

At the end of the term, the remaining land loan balance must be paid off in a lump sum or refinanced. Refinancing into a longer term can provide more time to pay off the loan.

Factors Affecting Land Loan Lengths

Several factors determine the term length a lender will offer for a land loan:

Loan type – Government-backed land loans, like USDA and VA loans, tend to have maximum terms of 5-10 years. Conventional land loans from banks may go up to 15 years.

Land development – Financing for raw, undeveloped land often caps out at 5 years. Improved land with utilities can qualify for longer 10-15 year loan terms.

Credit score – Borrowers with higher scores are seen as lower risk and may be offered longer repayment periods. Those with poor credit tend to get shorter terms.

Down payment – Large down payments reduce the risk to lenders, earning borrowers longer land loan terms. Small down payments result in shorter lengths.

Loan amount – The higher the loan amount, the riskier the loan. Lenders mitigate this with shorter terms on larger land loans. Smaller loans may allow longer terms.

Income – Higher incomes can qualify borrowers for longer land loan terms. Lower incomes generally get shorter terms to reduce risk.

In general, minimizing risk through credit, income, down payment size and other factors can help land loan borrowers qualify for more favorable loan term lengths from lenders.

The Pros and Cons of Short Land Loan Terms

The much shorter repayment periods of land loans compared to home loans come with both advantages and drawbacks:

Pros

• Lower interest rates – The shorter loan terms often mean lower interest rates than longer-term mortgages. This can save money over the life of the loan.

• Faster to pay off – With terms of just 1-15 years, land loans are repaid much quicker than a traditional 30-year home loan. This allows borrowers to own the land outright sooner.

• Lower total costs – Even if the interest rate is higher, the total interest paid over a short 1-5 year land loan can end up lower than that of a long-term home loan.

• Motivation to build – Short terms encourage borrowers to build on the land sooner rather than let it sit vacant for long periods.

Cons

• Higher monthly payments – Because the loan is repaid faster, monthly payments are higher than longer term loans with the same balance. This can strain the monthly budget.

• Less time to repay – The abbreviated repayment schedules provide little wiggle room if borrowers encounter financial issues before the land loan is repaid.

• Balloon payment due – Most borrowers can’t fully repay the balance in the short term, requiring a lump sum payment at the end. This can be difficult to save up for.

• Refinancing often needed – To avoid the large balloon, borrowers usually have to refinance into a new longer-term loan, adding time and costs.

Overall, land loan borrowers get the biggest benefits from short terms when they have the income and savings to handle the higher payments and plan to build soon. Under other circumstances, shorter terms may simply add stress.

Finding the Right Land Loan Term Length

Land loan borrowers should consider the pros and cons of different term lengths to find the right balance for their unique situation. Here are some final tips for choosing the ideal land loan term:

• If planning to build very soon, a short 1-5 year loan can work well.

• If building will be delayed a few years, opt for a longer 10-15 year term.

• Make sure your budget allows you to handle the monthly payments comfortably.

• Calculate the balloon payment amount you’ll owe at the end – make sure you can save up.

• Compare interest rates on different term options to minimize total costs.

• Understand the costs and steps to refinance before the balloon comes due.

With the right loan term length choice based on your personal financial situation and goals for the land, a land loan can be an optimal way to finance vacant property. Just be sure to select a realistic term that sets you up for land loan success.