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A land loan is a type of financing that borrowers can use to buy a plot of land for residential or business purposes. You’ll typically consider this type of loan if you want to purchase some land but don’t plan to build on it right away. If you are planning to start construction shortly after the purchase, you may consider a construction loan instead.
You can typically obtain a land loan from a bank or credit union, via seller financing or through the U.S. Department of Agriculture (USDA), which offers options for homebuyers with low to moderate income who are planning to build a home in an eligible rural area.
Purchasing vacant land to build a dream home or for recreational use someday can be an exciting prospect. But land loans work differently than traditional home loans, with shorter repayment terms that can impact your monthly payments. So how many years do you actually get to pay back a land loan? Let’s take a detailed look.
What Is A Land Loan?
A land loan, also known as a lot loan, is financing used specifically to purchase a vacant plot of land. This could be raw land with no infrastructure, or a parcel that’s partially or fully developed with access to utilities.
Land loans allow buyers time to save up for construction costs or wait for the right time to build. They provide an alternative path to homeownership for those who want to build new. Land loans also enable entrepreneurs to secure land for future commercial development.
How Land Loans Differ From Mortgages
It’s important not to confuse land loans with traditional mortgages used to purchase existing homes Here are some of the key differences
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Purpose Land loans finance vacant land only. Mortgages buy move-in ready homes
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Term: Land loans typically run 1-15 years. Mortgages can be 15-30 years.
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Collateral: Land loans are riskier, so lenders may require 50% down or more. Mortgages need as little as 3% down.
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Rates: Land loans often have higher interest rates than mortgages.
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Payments: The shorter term of a land loan equals higher monthly payments.
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Building: You don’t have to build right away with a land loan. Mortgages require an existing dwelling.
Land Loan Terms
The repayment term, or length of the loan, is one of the biggest differences between a land loan and a conventional mortgage.
Mortgages routinely offer 15, 20, or 30-year terms. But land loans typically max out at around 15 years. Some land loans have even shorter terms of 5, 7, or 10 years.
The reason comes down to risk. Lenders consider land loans riskier because:
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There’s no dwelling securing the loan yet through collateral.
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Borrowers are more prone to stop making payments on raw land than a primary home.
To mitigate their risk, lenders limit repayment periods. The shorter timeline reduces a lender’s exposure by getting repaid faster.
Impact of Shorter Terms
While 15 years may seem like plenty of time, the shorter repayment period does impact your finances. Here are some key points to consider:
Higher Monthly Payments – With less time to repay the loan, your monthly payments will be higher than an equivalent 30-year mortgage. Make sure you’re comfortable with the payment based on your budget and income.
Loan Amount Limits – Even if approved for a certain purchase price, a higher monthly payment could restrict the loan amount you can realistically afford. You may have to lower the offer price on the land.
Interest Savings – One benefit of short terms is less interest paid over the life of the loan compared to a 30-year mortgage. Less interest can mean substantial savings.
Refinancing Difficulty – If needing to refinance later, a term under 15 years could make it harder compared to a longer mortgage.
Balloon Payment – Some land loans include a balloon payment – a large lump sum payment due at the end of the loan. Be prepared to refinance or pay off this balance.
Typical Land Loan Terms
While specific loan terms depend on your lender, credit, and finances, here are some general guidelines on land loan length:
- Raw land – Usually 7-15 years due to highest risk
- Partially improved – Potentially 10-15 years as infrastructure reduces risk
- Fully improved – More likely to qualify for full 15-year term
Better credit, income, and down payment amount also aid longer terms. Those with excellent credit scores above 740 are most likely to receive max repayment periods.
Can I Get a 30-Year Land Loan?
While less common, some lenders may offer land loans up to 30 years. This provides repayment flexibility comparable to a traditional mortgage.
Candidates for 30-year financing typically need:
- Stellar credit of 750+
- At least 20-30% down payment
- Solid income and low debt-to-income ratio
- Clear plans for property use and development
Even with great credit, total interest costs will likely be higher than shorter terms. Ensure you’re comfortable with long-term financing costs.
Refinancing the Land Loan
Many get land loans with the goal of eventually building and refinancing into a mortgage. This process enables locking in better rates and terms after construction.
During refinancing:
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The new dwelling now serves as collateral to reduce risk.
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Your credit may have improved, unlocking better mortgage rates.
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You can reamortize over a new 15 or 30-year repayment term.
With proper planning, the land loan gives time to build and prepare for refinancing. This can make the short term and higher payments worthwhile long-term.
Alternatives to Land Loans
Beyond traditional financing, other options exist to purchase land without cash including:
- Seller financing – Buy directly from the seller with a land contract
- Home equity loan – Use existing home equity to finance a land purchase
- Personal loan – Unsecured lump sum financing that may be used toward land
- Construction loans – One-time-close loans with built-in land purchase financing
Each option has pros and cons to weigh based on your financial situation. Shop multiple lenders and compare costs.
Tips for Getting the Best Land Loan Terms
While 15-year loans are common, taking some steps can help boost your chances at the longest term possible:
- Improve your credit – Lenders favor scores of 720+
- Lower your debt – Decrease credit utilization and other debt commitments
- Save for a larger down payment – 20% down or more appeals to lenders
- Know the land’s purpose – Document plans for the property, like building a home
- Compare lenders – Shop national banks, credit unions, and specialty lenders
The right lender and loan program for your situation can make a major difference in obtaining more favorable financing.
The Bottom Line
When it comes to land loans, the shorter repayment terms compared to mortgages are key – often ranging from just 5-15 years total. While this requires higher monthly payments, proper budgeting and planning makes these loans a feasible option for purchasing land. Refinancing the land loan into a mortgage with a longer term is also an option once construction is complete.
How does a land loan work?
A land loan functions similarly to a traditional mortgage loan that it offers a lump-sum payment to aid in the purchase of a plot of land. “It could be a lot in a subdivision or thousands of acres,” says Casey Fleming, a mortgage advisor and author of The Loan Guide. You’ll then pay back the debt over a set period.
Depending on your situation and the lender, repayment terms on land loans may range from a couple of years to 20 years, and they may or may not include a balloon (or big) payment at the end of your term.
Because there’s no home to use as collateral, though, land loans tend to be riskier to lenders than mortgage loans. As a result, you can generally expect stricter underwriting guidelines and higher interest rates.
Depending on where you go, you may find minimum credit scores in the upper 600s or lower 700s, and you may need to make a down payment of 15% or more — according to Fleming, a 35% or even 40% down payment is not uncommon. Interest rates are typically upwards of 6%, though yours will depend on your creditworthiness, income and down payment, among other factors.
You’ll also want to have a clear plan for development or construction on the land to provide to the lender. This is particularly important with less developed lots.
Pros and cons of land loans
If you’re thinking about buying land to build your home or business, it’s crucial that you understand both the benefits and the drawbacks of using a land loan to finance the transaction. Here’s what to consider:
| PROS | CONS |
|---|---|
| Provides an option if you’re short on cash: Land can be expensive, but you can’t get a traditional mortgage loan with no home, and you can’t get a construction loan unless you plan to start building immediately. If you want to buy some land for future use, this option can help you achieve your goal without needing to shell out a lot of cash. | Can be expensive: Land loans carry higher interest rates and shorter repayment terms than traditional mortgage loans, so you’ll want to make sure that you can afford the monthly payments. Double-check your budget and cash-flow to confirm affordability. |
| Gives you flexibility: Buying a plot of land instead of an existing home or business location gives you the flexibility to develop the property as you want. | Can be tough to obtain: Not all home lenders offer land loans, and even if you find ones that do, you’ll need to meet higher credit requirements and put down more money, especially if the land isn’t developed. |
| Government loans can be relatively affordable: If you qualify for a USDA rural housing site loan, you can avoid some of the more expensive lot loan options. | You may run into complications: Building on an empty plot of land can come with additional complications, including surveying and permit requirements, developments and more. Even with the best plans, it’s possible to fall short of your expectations and still be left with the land loan to repay. |
How to Get a Land Loan (And What to Know Before You Do)
FAQ
What is the longest you can finance land for?
Which loan is best for buying land?
How hard is it to borrow money to buy land?
How does a land loan work?
A borrower obtains a land or lot loan the same way a home buyer obtains a mortgage loan. However, it can be harder to determine what the land is worth because there is no property collateral. This means that land loans are a riskier transaction for lenders, which results in higher down payments and interest rates than a typical home loan.
How does a land loan calculator work?
This land loan calculator computes monthly payments & the total interest based on the purchase price, downpayment amount, interest rate and number of monthly payments. Are you buying a house or car? If so, we also offer custom calculators for home loans & automotive loans.
What are the eligibility requirements for a land loan?
The potential future value of the land can vary depending on these factors. Eligibility requirements vary depending on the lender, but lenders usually want land loan borrowers to have a credit score in at least the upper 600s and a debt-to-income ratio of 43% or lower. You might need to make a down payment of up to 50%.
What is a land loan vs a mortgage?
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. Not all lenders offer land loans, so it’s important to do your research to find a lender that specializes in this type of financing.