Everything You Need To Know About Getting A Loan For A Lot Of Land

Buying a large piece of land to build a house or start a business on is an exciting prospect! However, land can be expensive, so most people need to take out a loan to afford it If you’re thinking about getting a loan to buy a lot of land, this article will tell you everything you need to know

What Types Of Loans Can You Get For Land?

There are a few different loan options when it comes to financing land purchases

• Raw land loans – For completely undeveloped land with no utilities or road access. These loans have higher interest rates and require a large down payment.

• Unimproved land loans – The land may have some utilities but still needs improvements Easier to qualify for than raw land loans but still have higher rates and down payments

• Improved land loans – The land is fully developed with road access and all utilities. More affordable rates and down payments than other land loans.

• USDA loans – For purchasing rural land to build a primary residence on. Offered by the U.S. Department of Agriculture to low/moderate income buyers. Can get 100% financing in some cases. [1]

• Commercial land loans – For business uses, offered by banks/SBA. Long repayment terms up to 25 years. [1]

The type of loan you can qualify for depends on factors like your credit score, income, the condition of the land and your plans for using it. Work with a lender to determine the best option.

How Do Land Loans Work?

The process of getting approved for and receiving a land loan is similar to getting a mortgage: [1]

• Apply – Provide financial info, credit history, details on the land purchase.

• Get approved – The lender reviews your application and offers loan terms.

• Make down payment – Typically 20% or more of purchase price. More required for raw/unimproved land.

• Close on the loan – Legal process of securing financing and taking ownership.

• Make payments – Repay loan principal plus interest over time. Length depends on loan.

Land loans tend to have higher interest rates and require larger down payments than home loans since the land can’t be used as collateral. Good credit and steady income are key to getting approved and securing better rates. [1]

What Are The Pros And Cons Of Land Loans?

Land loans allow you to buy and start building on land you may not otherwise be able to afford. However, there are some key pros and cons to consider: [1]

Pros:

• Build your dream home or business from the ground up.

• Capitalize on a great undeveloped property.

• Cheaper to buy land upfront rather than purchase a developed property.

Cons:

• Higher interest rates and down payments than traditional mortgages.

• Risk of complications or delays during land development.

• Easier to qualify for regular home loan than a land loan.

If you have a solid development plan and budget, the pros may outweigh the cons. But carefully evaluate your financial situation before committing to a land loan.

What Credit Score And Income Do You Need?

Since land loans are riskier for lenders than home loans, the credit and income requirements are more stringent: [2]

• Credit score – 720 or higher is recommended for the best rates/approval odds. Some lenders may accept scores in the high 600s.

• Debt-to-income ratio – Aim for 36% or lower. The lower your DTI, the better.

• Down payment – Typically 20-25% minimum. Can sometimes be as high as 50% for raw land.

• Income – Must demonstrate stable income that covers mortgage payments, taxes, insurance and other debts.

Meeting these standards shows lenders you’re financially responsible and can handle the repayment obligations. An established credit history is key.

How Much Land Can You Get Financed?

There are a few factors that determine how much land you can get approved for:

• Loan type – Certain loans have max limits. USDA loans currently cap out at $647,200. [3]

• Your income – Lenders want to see you can afford the monthly payments. Higher income = ability to finance more land.

• Down payment – The more you put down, the higher loan amount you can qualify for.

• Land value – Expensive properties with higher loan amounts may be harder to finance.

• Lending regulations – Banks have lending limits per person/institution they must adhere to.

While every situation differs, it’s possible to finance hundreds of acres depending on the land value and your financial qualifications. Speak with a lender early about how much you can borrow.

Do Land Loans Require A Down Payment? How Much?

Yes, virtually all land loans require a down payment. The specific down payment amount depends on factors like: [1]

• Condition of the land – Raw land requires 50% down or more. Improved land can be 20% down.

• Your credit score and income – Excellent credit may qualify you for 10-15% down.

• Loan program – USDA loans offer 0% down options in some cases.

• Lender requirements – Some banks want minimum 20-25% down regardless.

• Loan-to-value ratio – The higher the LTV, the higher the down payment needs to be.

While 0% down payment land loans are advertised, they are exceptionally rare. Have at least 20-25% saved as a down payment baseline before applying.

Can You Get Owner Financing On Land?

Owner financing, or a land contract, is a viable alternative to bank land loans. With owner financing: [1]

• You purchase the land directly from the seller instead of a bank.

• The seller finances the purchase and acts as the lender.

• You make payments to the seller over time until the land is paid off.

• No bank qualifying needed, more flexible terms than bank loans.

Downsides include higher interest rates, fewer legal protections, and lingering ownership claims by the seller. Owner financing isn’t possible with all land sales but can provide more flexibility.

Should You Build Or Buy A House?

If you’re buying land to build a home on, you may be wondering whether building a custom house or buying an existing home is the better route. Here are a few things to consider:

Custom building pros:

• Design your ideal home and layout.

• Choose higher end finishes and features.

• Potentially higher home value long-term.

Buying existing pros:

• No construction, permits, delays or errors.

• Often cheaper than building – no land loan needed.

• Can move in right away.

• More protection as buyer of completed home.

Custom building allows ultimate flexibility but involves added costs, time and risk. Buying an existing house is simpler but limits customization. Assess both options carefully in relation to your budget and goals before deciding.

Tips For Getting Approved For A Land Loan

Because land loans are more restrictive than home loans, here are some tips for getting approved:

• Have pristine credit – Scrub your credit reports of any errors, pay down debts and maintain on-time payments.

• Make a large down payment – Plan for at least 25%, or more for raw land. Save early for this.

• Know the land value – Get an appraisal to confirm the price isn’t inflated.

• Have a detailed development plan – Show lenders your experience and concrete project roadmap.

• Use a reputable lender – Established local banks are best suited for land loans.

• Bring strong income/assets – Provide proof you can handle the loan responsibilities.

With proper preparation, an excellent financial profile, and persistence, your dream piece of land can become a reality!

The Bottom Line

Buying a large parcel of vacant land to eventually build on requires special financing. While land loans make this possible, they have higher standards and costs than a typical mortgage. If your credit is good and you have funds saved for a solid down payment, you can likely finance many acres of land depending on the price. Do your homework ahead of time, choose the right lender, and be ready to provide documentation that instills confidence you can handle the obligations. With some patience and diligence, you’ll be breaking ground on your future home or business in no time!

References

[1] https://www.rocketmortgage.com/learn/land-loans

[2] https://trb.bank/mortgage-news/what-you-need-to-know-about-texas-land-loans/

[3] https://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do?NavKey=home@1