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.
Buying land to build a dream home or start a business is an exciting prospect. But coming up with a large down payment can be a major obstacle for many hopeful land buyers Thankfully, there are ways to get a land loan with a low down payment if you know where to look
What Are Land Loans?
A land loan also called a lot loan is a mortgage loan used to purchase a vacant piece of land. Unlike a construction loan, a land loan doesn’t require you to start building right away. Land loans typically have shorter repayment terms of 2-5 years and require a balloon payment at the end.
Land loans are offered by banks, credit unions, government agencies like the USDA, and specialty lenders. However, they can be harder to find than regular home loans since not all lenders provide them. The type of land also impacts loan availability and rates. Loans for improved land ready for building are easier to find than those for raw, undeveloped land.
Land Loan Down Payment Requirements
Down payments for land loans are generally higher than for standard mortgages. The minimum down required depends on the land type:
- Raw land – 35%
- Unimproved land – 25%
- Improved land – 15%
So if you’re buying raw land for $100,000, you’d need at least $35,000 upfront. The good news is there are ways to get approved for a land loan with a lower down payment than these standards.
Tips for a Low Down Payment Land Loan
Here are some strategies to reduce or eliminate the down payment on a land loan:
Find 100% financing programs
Some government and nonprofit programs offer land loans that require no down payment, including:
- USDA loans – For low-income buyers in rural areas planning to build within 2 years.
- VA loans – For veterans buying land to build a home.
Use seller financing
Seller financing means the property seller provides financing instead of a bank. This may allow for more flexible terms like a lower down payment. You repay the seller over time.
Make a lower down payment
While standard land loan down payments are high, some banks may approve a lower amount if you have excellent credit and income. Shop around to see if any lenders will go below 20%.
Use home equity
Tap the equity in your current home to make a down payment through a home equity loan or line of credit.
Exchange services
Offer professional services to the seller like legal advice or accounting work in lieu of a cash down payment.
Swap land
If you own other land, offer it to the seller as a form of down payment.
Add a coborrower
Bringing on a coborrower with better finances may help you qualify for a lower down payment.
Make improvements
If buying raw land, make basic improvements like grading, gravel roads, or installing utilities. This may lower the down payment.
Pros and Cons of Low Down Payment Land Loans
Low down payment land loans offer several advantages:
Pros
- Improve affordability
- Allow you to buy sooner
- May require less cash reserves
- Potentially get better rates with good credit
Cons
- Higher monthly payments
- More interest paid over the loan term
- Potentially pay mortgage insurance
- Higher risk of foreclosure if you default
While tempting, reduced down payments aren’t right for everyone. Carefully consider both the benefits and drawbacks when pursuing a low down payment land loan.
Alternative Ways to Buy Land with Little Money Down
If you can’t qualify for a low down payment land loan, here are a few other options for buying land without much cash:
Lease-to-own – Find a seller willing to lease you the land for 1-5 years with the option to purchase at the end of the lease. Your lease payments go towards the sale price.
Owner financing – The seller provides private financing with flexible terms like low down payment, no credit check, and potentially lower interest rates.
Crowdfunding – Use crowdfunding platforms to raise funds from multiple contributors to cover your down payment.
Partner financing – Team up with family, friends, or business partners who can contribute to the down payment.
Seller concessions – Ask the seller to cover some or all of your closing costs to lower cash needed.
Land trusts – Look into community land trusts that offer long-term leases on land at below-market value. Can sometimes include option to buy.
Microloans – Apply for small loans from nonprofits focused on helping aspiring business owners in underserved communities.
Final Tips for Getting a Land Loan with Low Down Payment
- Shop around with multiple lenders to compare rates and terms
- Opt for the shortest loan term you can afford to reduce interest costs
- Look into loan programs targeted to first-time home buyers, veterans, or low-income borrowers
- Ask sellers about owner financing or other creative options to lower the down payment
- Improve credit and debt-to-income ratio to better your chances of approval
- Consider waiting and saving up if you can’t comfortably afford the monthly payments
While paying less upfront can seem advantageous, don’t let desperation lead you into a land loan that doesn’t fit your budget. But with the right planning and research, low down payment land loans can empower many hopeful land owners to start building their dreams sooner.
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.
VA land loan
VA loans are for eligible military service members and veterans and are guaranteed by the U.S. Department of Veterans Affairs (VA). You have two main options for financing land:
- The VA construction loan program lets you use a VA loan to buy land, but only if you’re going to later build a house on it. The land will need to be improved, meaning it can be accessed via paved roads and can be hooked up to basic utilities. The program is only open to people who want to fund a new build with a VA loan and will also use a VA loan to finance their new home after construction is complete.
- The VA farm loan program is for borrowers who want to purchase farm land that already has a home built on it.
See current VA mortgage rates.
Can I use my land as down payment for a construction loan?
FAQ
What is the lowest credit score to buy land?
What credit score do you need to buy land in Oklahoma?
Which loan is best for buying land?
How much down payment do you need for a land loan?
Some land loan lenders require a substantial down payment — ranging from 20 percent to 50 percent of the purchase price — and charge higher interest rates. Others have significantly shorter repayment terms than a 15- or 30-year mortgage, as well, or specific requirements, like a cap on the amount of acreage.
Can you buy land without a down payment?
However, you may be able to finance a land purchase without a down payment, provided you adhere to the guidelines of these specialty loan programs. Guaranteed by the U.S. government, the USDA loan gives eligible land buyers an opportunity to buy land with zero money down, but these 0 down land loans also require constructing a property there.
Can you get a lot loan with no down payment?
They have low interest rates, and depending on the situation, borrowers may qualify for a lot loan with no down payment. If you’d like to use a land loan for commercial purposes, you can apply for an SBA 504 loan. SBA loans are provided by the Small Business Administration (SBA) and are intended for business owners who need funds to purchase land.
What is a no-down-payment land loan?
With this type of loan, the value of the land cannot be more than 30 percent of the total value of the property. Another option for no-down-payment land purchases is the VA loan, which is a private loan guaranteed by the U.S. Department of Veterans Affairs.