Everything You Need To Know About Loans For Lots Of Land

Buying a piece of land to build a home or start a business on can be an exciting venture. However, land is often expensive, so you’ll likely need to finance the purchase with a loan. Loans specifically for vacant land, often called lot loans or land loans, can help make your property ownership dreams a reality.

In this comprehensive guide we’ll cover everything you need to know about getting a loan for a lot of land including

• What is a land loan?
• Types of land loans
• Qualifications and requirements
• Pros and cons
• Interest rates and fees
• Alternatives to land loans
• Tips for getting approved

What Is A Land Loan?

A land loan also known as a lot loan is a type of financing used to purchase a vacant plot of land. Land loans work similarly to traditional mortgages in that you borrow money from a lender and pay it back over time with interest. However, they are considered riskier than home loans because the land itself is the collateral, rather than an existing structure.

Land loans allow buyers to purchase land now and develop it later. You may use a land loan to:

• Buy land to build a primary home or vacation property on
• Purchase commercial land for a future business site or investment
• Acquire farmland or raw acreage

Land loan terms often range from 3-10 years. Shorter terms reduce the lender’s risk. Once you develop the land, you can refinance into a conventional mortgage.

Types Of Land Loans

There are three main categories of land loans:

Raw Land Loans

Raw land has no improvements at all, like grading, utilities, or road access. Since raw land cannot be occupied immediately, lenders consider it the riskiest type of land loan.

Down payments on raw land loans typically start at 25-30% of the purchase price. Interest rates are higher as well. Raw land loans may have shorter repayment terms of 1-5 years.

Unimproved Land Loans

Unimproved land has some basics like grading and gravel roads but still lacks utilities access. The land may be surveyed but is not ready for building.

An unimproved land loan is less risky than raw land, so you may only need a 20-25% down payment. Interest rates are moderate, and loan terms range from 5-10 years.

Improved Land Loans

Improved lots are build-ready with utilities, grading, surveyed boundaries, and gated access. They pose the least risk to lenders.

Improved land loans can have down payments as low as 15% of the purchase price. Interest rates are just slightly higher than traditional mortgages. Terms range from 10-15 years.

Qualifications And Requirements

While requirements vary by lender, here are some common qualifications for land loans:

• Good credit (690+ FICO score)
• 20-30% down payment
• Moderate debt-to-income ratio (36% or lower)
• Stable income and employment history

You’ll also need to provide:

• A plan for developing the land if building
• Details on zoning, easements, utilities, and other due diligence
• Appraisal of the land value

If the land is for farming, you may need an agricultural business plan showing projected income and expenses.

Pros And Cons Of Land Loans

Let’s look at some of the key advantages and disadvantages of using a land loan.

Pros

• Finance land purchases without large upfront cash
• Lock in purchase price for future development
• Usually easier to qualify than construction loans
• Interest may be tax deductible (consult a tax pro)

Cons

• Higher interest rates and fees than conventional mortgages
• Larger down payments required
• Shorter repayment terms
• Risk of development delays or zoning changes
• Possible prepayment penalties

As you can see, there are good reasons to use land loan financing, but also some drawbacks to consider. Make sure it aligns with your goals and budget.

Interest Rates And Fees On Land Loans

Land loan interest rates are usually 0.5 – 1% higher than comparable home mortgage rates. This accounts for the increased risk lenders take on. Improved land has the lowest rates, while raw land is the highest.

Typical land loan rates range from 5-7% for improved land, 6-8% for unimproved land, and 7-9% for raw land based on current market conditions. Actual rates depend on your credit, loan amount, down payment, and other factors.

In addition to higher rates, land loans charge 1-2% upfront loan origination fees. There may also be application fees, appraisal fees, and title search charges. Closing costs are similar to those for traditional mortgages.

Always compare land loan offers from multiple lenders to find the best deal. Ask about any prepayment penalties too.

Alternatives To Land Loans

If you don’t qualify for a land loan or want to avoid the high costs, here are a few other options:

Home Equity Loan

Tap the equity in your current home to buy land. Can offer better rates/terms than land loans.

Seller Financing

The seller acts as the lender. Easier to qualify, but higher costs.

Crowdfunding

Use an online platform to raise funds from multiple investors.

Cash Purchase

Save up to buy the land outright without financing. Often takes longer.

Consider which option best matches your financial situation and land goals.

Tips For Getting Approved For A Land Loan

Because lenders view land loans as riskier, it can help to:

• Put at least 25% down on raw land, 20% on unimproved land
• Have great credit (700+ score) and low debt ratios
• Show detailed development plans and project timelines
• Purchase improved land ready for building
• Use a reputable title company and inspector
• Provide zoning letters, appraisal, survey, etc.
• Shop multiple lenders to compare loan options

Also look for local community banks that may be more flexible than big banks on land loans.

Pre-qualification can help you determine the loan amount and rates you may be eligible for.

The Bottom Line

When used strategically, land loans can help you get into property ownership sooner to start building your dream home or business. Just be aware of the higher costs and risks involved compared to conventional mortgages. Seek professional advice when evaluating land loan offers.

With proper planning and preparation, a land loan may provide the financing you need to invest in that ideal country acreage, scenic hilltop parcel, or corner lot downtown. Do your homework upfront to make sure it aligns with your budget and goals.