Land loans can help you buy property without any structures on it, especially when you don’t have immediate plans to build on the land. Whether you’re planning to build your dream house someday or buying a new location for your business, you might need a land loan to make it happen.
We’ll go over the basics of land loans, how they work and where to get them.
Purchasing land to build your dream home or start a business can feel out of reach when you have bad credit. Unfortunately, poor credit scores can limit your financing options and lead to higher interest rates. However, there are still pathways to land ownership, even with less-than-perfect credit.
In this comprehensive guide we’ll walk through everything you need to know about getting approved for land loans when you have bad credit. Read on to learn more about
- What land loans are and how they work
- Land loan requirements when you have bad credit
- Tips for finding the best land loan rates
- Alternative land financing options
- FAQs about land loans for bad credit
Whether you have plans to develop the land someday or want to purchase land as an investment, our goal is to empower you with the knowledge to secure financing and make your land ownership dreams a reality.
What Are Land Loans and How Do They Work?
A land loan, also known as a lot loan, is a way to finance real estate property that doesn’t have any structures built on it yet. Land loans give you financing to purchase vacant land now without requiring immediate plans to develop it.
With a land loan, you’ll make a down payment like a traditional mortgage, then repay the remaining loan amount plus interest over a set repayment term. The repayment term on a land loan is usually shorter than a typical mortgage, ranging from 1-5 years. At the end of the repayment term, most land loans have a balloon payment for the remaining balance.
Land loans are offered by banks, credit unions, specialty lenders, and government programs. However, not every mortgage lender will finance raw land. Local lenders familiar with land values in your area may be more likely to fund land loans.
Land Loan Requirements When You Have Bad Credit
While getting a land loan with bad credit is possible, you’ll likely face stricter eligibility requirements compared to applicants with good credit. Here are some common land loan qualification criteria to be aware of:
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Credit score requirements Most lenders look for credit scores of at least 600-650 for land loans, The minimum can range based on the lender
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Down payment: Expect a higher down payment of 25-35%. More developed land may allow down payments as low as 15%.
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Debt-to-income ratio Your total debt balances compared to income should be 43% or less. A lower ratio is better
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Loan term: Land loans typically have shorter 1-5 year repayment terms. Longer terms may be restricted.
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Interest rates: Borrowers with lower credit scores should prepare for higher interest rates on a land loan.
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Collateral: The land itself secures the loan, meaning foreclosure is a risk if you default.
While it can be more challenging, pre-qualification is still possible even if your credit score falls short of conventional requirements. Taking the time to improve your credit and consulting multiple lenders can help increase your chances of getting approved.
Tips for Finding the Best Land Loan Rates With Bad Credit
Finding the right lender who will offer you the best possible land loan terms is key. Here are some tips that can help:
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Shop around: Compare quotes from multiple lenders. Local banks and credit unions are a good place to start your search.
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Look for land loan specialists: Seek out lenders like farm credit organizations that specialize specifically in land financing.
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Ask about credit score exceptions: Many lenders allow some flexibility on credit score cutoffs. It doesn’t hurt to ask if they’ll make an exception.
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Inquire about down payment assistance: Some land programs help offset down payment costs for low income applicants.
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Consider an FHA land loan: FHA land loans only require 3.5% down and have lower credit standards.
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Improve your credit: Work on increasing your score before applying to potentially get better rates.
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Bring on a cosigner: Adding a cosigner with better credit can help you qualify and lower your interest rate.
Shopping around and speaking to loan officers can help give you a realistic perspective on your chances of approval for a land loan. Be upfront about your current credit situation when applying so lenders can give you accurate rate quotes.
Alternative Financing Options for Land with Bad Credit
If you’re struggling to find a lender willing to finance your land purchase, alternative options exist too. Here are a few other ways to buy land with less than perfect credit:
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Owner financing: The seller carries the loan instead of a bank. This works best when buying from motivated sellers.
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Hard money loans: Asset-based loans from private investors offer high loan-to-values, but charge higher interest rates.
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Crowdfunding: Platforms like Kickstarter let you pitch land investment projects to attract pooled funds from groups.
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Lease-to-own: Rent the land first, then purchase it outright from the owner after an agreed-upon period.
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Land trusts: Nonprofit programs acquire land and provide 99 year ground leases to residents who build housing.
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USDA loans: Consider a USDA land loan if purchasing farm/ranch land in eligible rural locations.
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Peer-to-peer loans: Borrow from individuals instead of institutions via sites like LendingClub.
Depending on your circumstances, less conventional routes to land ownership like these may be an option worth considering. Weigh the costs and benefits of each creatively.
Frequently Asked Questions About Land Loans for Bad Credit
If you still have questions about getting approved for a land loan when you have bad credit, here are answers to some frequently asked questions:
What credit score is needed for a land loan with bad credit?
While lending standards vary, most lenders look for credit scores starting in the mid 600s to approve land loans. Scores under 600 will face greater challenges. Shop around with multiple lenders to find one able to work with your current score.
Can I get a land loan to build a house with bad credit?
Financing raw land for future construction is difficult with low credit scores. However, you may be able to qualify for a construction loan or construction-to-permanent mortgage more easily once the land is paid off.
How much down payment is needed for a land loan with bad credit?
A higher down payment of 25-35% is typical for land loans with bad credit. Improved land with utilities may allow down payments as low as 15% with some lenders. Ask if down payment assistance programs are available.
What is the interest rate on land loans for bad credit?
Land loan rates with bad credit are usually higher, ranging from 8-15% depending on your specific credit score and history. Taking steps to improve your credit can help reduce interest rates.
Should I get a land loan with bad credit?
Land loans can still be a worthwhile investment even with bad credit, depending on your financial plans for the property. Compare costs and shop lenders to find reasonable rates and terms that fit your budget.
Find the Financing Needed to Achieve Land Ownership Goals
Our team at Acorn Finance aims to connect you with personalized land loan offers from top national lenders to fit your needs. Getting pre-qualified is quick, easy, and doesn’t impact your credit score. See what financing options you may qualify for today!
Home equity loan
If you own a home with a significant amount of equity, you may be able to take out a home equity loan and use the proceeds to buy land. Equity is the portion of your home that you own outright. You can calculate how much equity you have by subtracting what you owe on your mortgage from your home’s value.
With a home equity loan, you’ll receive a lump sum up front and pay it back over time, usually at a fixed rate. You’re not limited in what you can use the money for. So, if you have enough equity, you may qualify for a large enough loan to buy a parcel of land.
If the equity in your home isn’t enough to buy land outright, you may be able to use your home equity loan to make a down payment on a land loan.
See current home equity loan rates.
How to qualify for a land loan
You’ll typically need a higher down payment and credit score to qualify for a land loan, compared to traditional mortgage requirements. Usually, the more developed the property, the lower the down payment you’ll need.
Down payment minimum: 15% to 35%The Federal Deposit Insurance Corporation (FDIC) sets minimum down payment requirements for land loans, though individual lenders may decide to set more stringent standards. The minimum down payments required by FDIC standards are:
→ Raw land: 35% → Unimproved land: 25% → Improved land: 15%
Debt-to-income (DTI) ratio: 43% maximumThe maximum DTI ratio is another qualification factor that varies lender to lender but, in most cases, you won’t be a good candidate for a loan unless your DTI is 43% or lower.
Credit score minimum: 700The FDIC doesn’t have a hard minimum when it comes to the credit score needed to qualify for a land loan. However, it’s common for lenders to require at least a 700 score. In some cases you may squeak in with a score in the high 600s or, on the other hand, you may be required to increase your score to the lower 700s — it’s ultimately up to your lender.