Buying land to build a home farm or start a business is an exciting endeavor! However, most people need to take out a loan to be able to afford the initial purchase. I want to provide you with a comprehensive guide on the loan options available to finance land, the pros and cons, and steps for getting approved.
What Is A Land Loan?
A land loan, also called a lot loan is a financing option that lets you borrow money to purchase a plot of land. Unlike a traditional mortgage a land loan doesn’t fund the purchase of a property that already has a home or building on it.
Land loans work similarly to mortgages in that you’ll make a down payment and repay the loan amount plus interest over a set repayment term. The land itself serves as collateral for the loan.
There are a few types of land loans:
- Raw land loans – For undeveloped land without access to utilities
- Unimproved land loans – For partially developed land with some infrastructure
- Improved land loans – For land with utilities and ready to build on
The qualifications and interest rates vary depending on the land type.
Reasons To Use A Land Loan
There are many great reasons to take out a land loan rather than buying an existing property
- Build your dream home – Design and build a custom house perfectly suited to your needs
- Farm land purchase – Buy acreage for crops, livestock or other agricultural use
- Commercial land – Invest in land for future business expansion or development
- Land investment – Purchase land you believe may appreciate in value over time
- Recreational land – Buy land for hunting, camping or other recreational use
A land loan provides financing so you can purchase property for all these purposes and more.
Land Loan Qualification Criteria
Qualifying for a land loan is more difficult than getting approved for a typical mortgage. Lenders view these loans as higher-risk since there isn’t a completed property as collateral.
Here are typical land loan eligibility requirements:
- Down payment – Often 20-35% is required
- Credit score – Minimum of 680-700
- Debt-to-income ratio – Maximum of 43%
- Loan term – Often just 2-5 years before a balloon payment is due
Come prepared with a higher down payment and excellent credit when applying for a land loan.
How To Get A Land Loan
You have several options for getting a loan to purchase land:
Local Bank Or Credit Union
The most straightforward route is getting pre-approved with a local lender familiar with land values in your area. A strong relationship with your bank improves your chances.
National Lenders
There are national lenders that offer land loans, typically through an online process. This expands your possibilities if local banks turn you down.
Government Programs
Government-backed loans through the USDA, VA, and FHA allow financing for certain types of land purchases. These programs have eligibility requirements based on income, military service, land location, and intended property use.
Home Equity Loan
If you have substantial equity built up in your current home, a home equity loan or line of credit can provide funds to buy land. However, your home is then also at risk if you default.
Seller Financing
Some sellers may be willing to finance a land sale directly, which can help if you’re struggling to qualify for a traditional land loan. Make sure any seller finance terms are formalized in a written contract.
Investors
Finding a private investor to finance your land purchase is possible if they believe your plans for the property have profit potential. You may need to pay a higher interest rate or offer an ownership stake.
Pros And Cons Of Land Loans
Carefully weigh the advantages and disadvantages before committing to borrow money to buy land:
Pros
- Achieve land ownership dreams
- Custom build your home
- Farm, ranch, or start a business
- Appreciation potential over time
Cons
- Tough eligibility requirements
- Large down payment usually needed
- Short repayment terms
- Land may be difficult to sell
- Property may be unbuildable
For many, the rewards outweigh the risks. But consider your financial situation realistically before taking the plunge.
Steps To Getting Approved For A Land Loan
If you’ve decided a land loan is your best option to purchase property, here are key steps that can help your approval chances:
Ensure You Meet Lender Requirements
Examine the typical land loan requirements above and try to get your finances and credit score in optimal shape before applying. This may mean paying down existing debts or waiting to improve your credit profile.
Research Land Value
Have an appraisal done on any land you want to make an offer on to substantiate the purchase price to lenders. Overpaying can cause denials.
Get Pre-Approved
Complete loan applications with multiple lenders to get pre-approved. This shows sellers you’re a serious buyer and gives you options.
Make A Large Down Payment
Put down 20-35% if possible. Bigger down payments reduce the risk for lenders. Make sure the funds are seasoned in your bank account.
Explain Intended Use
Provide detailed plans for how you intend to use the land. This reassures lenders you’re committed to developing the property.
Select The Right Loan Program
Choose loan types designed for your specific situation, such as an USDA loan for farmland or a VA loan for veterans.
Alternatives To Land Loans
If you’re having trouble qualifying for financing, here are some other options for purchasing land:
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Save up – Slowly build your savings over time until you can afford to buy land outright.
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Buy with cash from home sale – Sell your current house and use the proceeds to purchase land.
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Partner investor – Find an investor willing to jointly purchase the land.
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Buy cheaper land – Lower your purchase budget to qualify for financing on less expensive properties.
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Owner financing – Find a seller who will act as the bank and hold a mortgage on the land for you.
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Purchase option – Draw up a purchase option agreement giving you the right to buy at a set price within a timeframe.
With persistence and creativity, you can make your land ownership dream happen even with challenging finances.
Is Buying Land A Good Investment?
Purchasing vacant land for investment purposes can pay off, but also comes with risks:
Potential rewards
- Land values often appreciate over decades
- Profit from cash-flow generating activities like farming
- Realize gains from successful development or rezoning
Risk factors
- No rental income like other real estate investments
- Costs to maintain raw land
- Zoning changes can decrease value
- Natural disasters can damage land
- Low liquidity to sell quickly
Carefully research factors impacting demand and growth potential before investing in land. Prime locations near expanding city centers offer the highest upside.
Working With A Real Estate Agent
An experienced real estate agent can provide invaluable assistance throughout the land buying and financing process. Here are some key benefits:
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Access to off-market land listings – Agents often know of properties not actively advertised.
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Guidance on fair pricing – Agents have data on comparable land sales.
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Financing support – Agents can point you to lenders successful with land loans.
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Negotiation help – Agents have expertise negotiating land purchase agreements.
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Closing process navigation – Agents handle title, appraisal, and escrow coordination.
The right agent makes a land purchase far less intimidating, especially for first-time buyers. Lean on their expertise.
Is Buying Land Right For You?
Other Land Loan Financing Options
Given the above challenges, you may want or need to search further to find more acceptable terms to finance your land purchase. Here are a few resources that you can investigate.
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)
How does a land loan work?
A borrower obtains a land or lot loan the same way a home buyer obtains a mortgage loan. However, it can be harder to determine what the land is worth because there is no property collateral. This means that land loans are a riskier transaction for lenders, which results in higher down payments and interest rates than a typical home loan.
Can I get a personal loan to buy land?
Getting a personal loan has never been easier. The Rocket Loans SM application process makes borrowing simple. If a personal loan doesn’t sound like your best option for buying land, you can finance this purchase a few other ways. Let’s take a look at some of them. Most banks and credit unions offer land loans.
Where can I get a land loan?
The best places to get land loans are often local or regional banks and credit unions because they know the area’s market. “The key is finding a local bank in the area where you’re looking to buy land,” says Krichmar. “Lenders in the area are usually the best option. A lot of the major banks don’t offer land loans anymore.”
Do Land Loans Finance structure-free land purchases?
Land loans finance structure-free land purchases. See types, eligibility, alternatives and more. You would use a land loan to buy property that doesn’t yet have a home built on it. Land loans are riskier for lenders than mortgage loans, so the interest rates and down payments tend to be higher.