Buying bare land can seem like an exciting prospect – open spaces, room to build your dream home, and the potential for the land to increase in value over time. But coming up with the money to purchase raw, undeveloped land can be tricky. Unlike a traditional mortgage for an existing home, banks and lenders often view loans for bare land as riskier investments, and getting approved can require some extra legwork.
I’ve helped many clients navigate the process of securing financing to buy vacant property. In this article, I’ll walk through everything you need to know about getting a loan for bare land, including:
- What makes bare land loans unique
- Key factors lenders consider when underwriting these loans
- Your financing options for purchasing raw land
- Tips for getting your bare land loan approved
What Makes Bare Land Loans Different?
There are a few key differences that set bare land loans apart from regular mortgages and make them riskier in the eyes of lenders
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No existing structures or improvements With a home loan the house itself acts as collateral for the bank. With raw land, there are no buildings or infrastructure yet in place so less for the lender to recoup if you stop paying the loan.
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Land can be difficult to sell: If a borrower defaults on a home loan, lenders can usually sell the home relatively quickly to recoup losses. But undeveloped land may have a smaller pool of potential buyers, making it harder for banks to unload if needed.
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Higher chance of borrower default: Buyers tend to treat their land loans with less priority than a primary home mortgage. If money gets tight, they’re more likely to walk away from vacant land.
As a result, lenders view these loans as riskier and subject them to stricter terms:
- Lower lending limits
- Larger down payments required
- Shorter repayment terms
- Higher interest rates
Key Factors Lenders Consider
When reviewing a bare land loan application, lenders dig into all the specifics of the property and your plans for it. Be prepared to provide details on:
Location: Where the land is located matters. More remote, rural properties are considered higher-risk than land in developed areas.
Intended use: Do you plan to build on it soon or hold it as an investment? Immediate construction plans reassure lenders.
Improvements: Raw, undeveloped land with no utilities or infrastructure is harder to finance than improved land ready for building.
Zoning: Land zoned for commercial use may be easier to finance than residential. Its uses provide lenders more options if they must foreclose and sell.
Market value: Lenders will require an appraisal. Higher appraised values mean the land can better retain its value if resold.
Your finances: Your credit, income, and down payment amount will be scrutinized to ensure you can repay the loan.
Your Financing Options
While bare land loans come with more hurdles, they are still obtainable if you’re well prepared. Here are some potential sources to finance your land purchase:
Local Banks and Credit Unions
Pros:
- Local lenders understand the land value in your specific area
- More likely to invest in properties supporting community growth
Cons:
- Lower lending limits than national banks
- May still charge higher rates/fees than other options
National or Online Lenders
Pros:
- Offer loans in all 50 states
- Competitive rates and fees
Cons:
- Less familiar with local land values
- Volume-focused so may lack personal touch
Owner Financing
Pros:
- May provide more flexibility than banks
- Only need to negotiate with the seller
Cons:
- Limited financing options tied to what seller will offer
- Risk of seller defaulting before you fully own the land
Home Equity Loans
Pros:
- Interest rates tend to be lower than other options
- Can access funds quickly if you have sufficient home equity
Cons:
- Home could be at risk if you default on the loan
- Loan limits based on available equity and lender caps
401(k) Loans
Pros:
- Interest you pay goes back into your own account
- Usually lower costs than other financing methods
Cons:
- Not all employers offer 401(k) loans
- Limited to 50% of your vested account balance, $50k max
Tips for Loan Approval
Because lenders scrutinize bare land loans so closely, you need to be strategic to get approved on favorable terms:
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Shop lenders early: Get pre-approved so you know what you can afford. Lock in the rate once you find the land.
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Highlight improvements made: Clearing trees, installing utilities, zoning changes etc. can help justify the land’s value.
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Leverage use cases: Emphasize intended commercial use, immediate construction plans, etc. to reduce risk.
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Ask about seller financing: If available, may provide better terms than bank loans.
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Consider land trusts: Non-profit trusts provide alternative financing options for conservation land.
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Optimize your finances: Pay down debts, maintain timely mortgage payments etc. to look most creditworthy.
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Make a large down payment: Put down 20% or more if possible to reduce risk for lenders.
Though it requires some extra persistence, purchasing vacant land can absolutely be done with the right financing strategy tailored to your situation. As your loan officer, I can help analyze all your options, improve your chances for approval, and find a lender offering the best loan terms to turn your bare land dreams into reality!
Future Zoning
It is also wise to check with the local planning department to determine what the future holds for the immediate neighborhood. A new park down the street can raise property values in the coming years, while a new highway or sewage treatment plant is less likely to do so.
How Do Land Loans Work?
In general, a land loan works similarly to a standard mortgage. If you are approved for this type of loan, your lender will provide you with funds to buy your chosen lot of land. You will then pay them back, with interest, over the following years.
However, qualifying for a land loan can be more difficult than getting a regular mortgage because it is riskier for lenders. As a result, borrowers may have to prove that they have a good credit score (700 or above), and will have to explain what they intend to use the land for.
Borrowers should also highlight aspects of the property that need to be checked, like zoning, land use restrictions, surveyed boundaries, and access to utilities. These factors will give lenders an idea of how risky the loan might be.
Once all factors have been taken into consideration, the rates and other terms of the land loan can be issued. Land loan interest rates tend to be higher than standard mortgage interest rates, but a good credit score and low debt-to-income ratio can lower the cost.
How to Get a Land Loan (And What to Know Before You Do)
FAQ
Which loan is best for buying land?
How hard is it to borrow money to buy land?
How much is the down payment for land in Texas?
Can you get a loan for land in California?
How long do you have to repay a bare land loan?
The interest rates and terms of SBA loans can vary, but the repayment period typically lasts 10 – 25 years. If you’re interested in purchasing land but are wary of taking out a land loan, consider these other options that might end up being a more suitable choice for your needs.
What do you need to qualify for a bare land loan?
However, there are still general guidelines that are taken into consideration when a borrower applies for a land loan: Highlight necessary property checks, like zoning, land-use restrictions, surveyed boundaries and access to utilities Once a lender takes these factors into consideration, the rates and obligations of the land loan can be issued.
What are the benefits of bare land loans?
If building a home or business is important to you, there are many benefits of applying for a land loan. The biggest benefit by far is having the opportunity to build the home of your dreams. If you’re looking to use the land for commercial purposes, it can also give businesses the opportunity to capitalize on up-and-coming areas.
What are the conditions that need to be met in order for a bare land loan to be approved?
However, there are still general guidelines that are taken into consideration when a borrower applies for a land loan: Highlight necessary property checks, like zoning, land-use restrictions, surveyed boundaries and access to utilities Once a lender takes these factors into consideration, the rates and obligations of the land loan can be issued.