Land Loan Percentage Rates: What to Expect for Financing Land Purchases

Purchasing vacant land to eventually build a home or other property on requires a different type of mortgage than a traditional home loan. Land loans have their own guidelines and rates that buyers should understand when searching for financing.

This comprehensive guide examines typical land loan percentage rates across various terms. We’ll look at average rate ranges, what impacts land loan rates, and tips for securing the best rate on your land purchase loan.

Overview of Land Loan Rates

Land loans allow buyers to finance the purchase of a vacant lot or acreage to hold for future development Rates are generally a bit higher than rates for improved property

According to recent data here are typical rate ranges for land loans based on term length

• 4-year land loan – Rates from 6.5% to 8.5%, with an average around 7.5%
• 7-year land loan – Rates from 7% to 8.5%, averaging around 7.75%
• 10-year land loan – Rates from 7.5% to 9%, averaging around 8.25%
• 15-year land loan – Rates from 8% to 9.5%, averaging around 8.5%

These rate ranges can fluctuate up or down around 1% depending on your financial profile, the lender, and current market rates. Always compare multiple lender quotes to find the best deal.

What Impacts Land Loan Rates?

Several factors determine what interest rate you’ll pay on a land loan, including:

• Credit score – Borrowers with higher credit scores qualify for lower rates. Scores below 620 may disqualify you.

• Down payment – The larger your down payment, the better your rate. 20-25% down provides ideal rates.

• Debt-to-income ratio – Lenders look at your total monthly debts versus income. Keep your DTI below 50% for better rates.

• Loan term – Shorter terms get lower rates. But longer terms have lower payments.

• Property – Unimproved land is considered higher risk than improved property, so rates are higher.

• Purpose – Land loans for agriculture use tend to have more favorable rates than land meant for residential or commercial development.

Always try to put as much down as possible and improve these other rate factors to maximize your chances of getting the lowest rate.

Tips for Securing the Best Land Loan Rate

Follow these tips when applying for a land loan to help secure the lowest rate possible:

• Shop around – Compare quotes from multiple lenders. Local banks, credit unions, and national lenders like LendingTree all offer land loans.

• Check for land loan programs – Ask lenders if they offer special land loan programs with discounted rates or flexible qualifying.

• Ask about rate locks – Request to lock your rate 60-90 days before closing to protect against rate increases.

• Look for seller financing – If purchasing directly from a seller, ask if they will finance the purchase themselves at below market rates.

• Improve your financial profile – Pay down debts, maintain timely payments, and avoid new inquiries to boost your credit score.

• Make a large down payment – Put down 20-25% or more if possible to get the best interest rate.

• Consider a shorter term – Weigh if you can manage higher payments for a 4-7 year term to secure a lower rate.

With appropriate preparation and shopping around, you can potentially find land loan rates 1-2% lower than average. This can lead to substantial interest savings over the lifetime of your financing.

What Are Closing Costs on a Land Loan?

In addition to the purchase price and interest charges, you’ll also pay various closing costs when finalizing a land loan. These fees usually total 2-5% of the loan amount.

Typical closing costs include:

• Origination fee – 1% to 2% of loan amount
• Appraisal fee – $400 – $800
• Application fee – $50 – $100
• Credit report fee – $25 – $75 per applicant
• Attorney fees – $500 – $1,500
• Recording fees – Varies by county, usually $50 – $200
• Survey fee – $300 – $700 (sometimes required)
• Title fees – Title search, insurance, etc. Often $1,000 – $2,000
• Property taxes – Prorated amount due at closing

The lender will provide a Loan Estimate outlining all expected closing fees when issuing a loan offer. Ask questions and negotiate fees where possible. Consider rolling closing costs into the loan amount if needed.

What is a Typical Down Payment on a Land Loan?

Land loans usually require a higher down payment compared to a conventional home loan. Here are typical land loan down payment amounts:

• 10% down – Minimum required by some lenders, will have higher rates
• 15% down – Competitive rate option for buyers with good credit
• 20% down – Preferred by most lenders for the best rates
• 25%+ down – Maximizes chances for the lowest rates and easiest approval

Aim for at least 20% down if possible. This shows lenders you are financially committed to the property. A 20% down payment on a $100,000 lot would be $20,000 due at closing.

Some land loan programs allow as little as 5% or 10% down. But you’ll pay much higher interest rates and mortgage insurance with less than 20% down.

Do Land Loans Require Mortgage Insurance?

If you put down less than 20%, most lenders will require private mortgage insurance (PMI) on a land loan. PMI protects the lender if you default on the loan.

Monthly PMI premiums typically range from 0.5% to 2% of the total loan amount. For example, on a $200,000 loan at 1% PMI, you would pay an extra $200 per month.

PMI can be removed once you build on the property and the combined loan-to-value ratio for the land plus improvements is below 80%.

Some lenders may offer “no PMI” land loan programs with less than 20% down. But the rates are usually much higher on these options.

What Documents Do Lenders Require for a Land Loan?

Lenders require various documents to verify your identity, income, assets, and eligibility when applying for a land loan. Have these ready when starting the application:

• Loan application – Provides info on the loan amount, your income, employment, debts, and assets
• Purchase agreement – Contract detailing the land purchase terms
• Photo ID – Such as a driver’s license or passport for all applicants
• Tax returns – Past 2 years of returns to confirm income
• Paystubs – 30 days of paystubs to show current income
• Bank statements – 2 months to show cash reserves
• Collateral proof – Documentation of any additional collateral

The exact paperwork required may vary by lender. They will let you know all needed documents after starting an application.

Key Takeaways on Land Loan Rates and Financing

• Land loans have slightly higher interest rates than conventional mortgages, ranging from 6.5% to 9.5% based on your finances and the loan term.

• Key factors impacting your rate include credit score, down payment amount, debt-to-income ratio, loan purpose, and property type.

• Shop multiple lenders and improve your financial profile to help secure the lowest rate. Ask about special land loan programs or seller financing opportunities.

• Plan for closing costs equal to 2-5% of the total loan amount. Typical down payments are 10-25% – putting at least 20% down can earn the best rates.

• Land loans often require private mortgage insurance if you put less than 20% down. Prepare all needed documents and paperwork when applying.

With appropriate planning and preparation, you can obtain affordable financing to purchase your ideal vacant land property. Compare all options to find the best land loan rates and terms to match your budget and goals.