Loans for Lots of Land: Everything You Need to Know

Purchasing land to build a dream home or start a business can be an exciting prospect. However, land is one of the most difficult types of real estate to finance. Traditional mortgages require an existing structure as collateral, so funding raw land purchases requires special lending instruments. If you need financing to buy vacant land, here’s what you need to know about loans for lots of land.

What is a Land Loan?

A land loan, also called a lot loan, is a mortgage specifically designed for purchasing vacant land parcels. These specialized loans provide financing for raw land that doesn’t have improvements like utilities, grading, or access roads. Land loans are also used to purchase improved lots that are ready for construction.

Land loans function similarly to traditional mortgages in that the land acts as collateral for the loan. You’ll make a down payment upfront and repay the loan in installments over a set timeframe. The main differences are higher interest rates, larger down payments, shorter loan terms, and balloon payments.

Types of Land Loans

There are a few main categories of land loans:

• Raw land loans – For completely undeveloped land without any utilities or improvements. This option has the highest interest rates and requirements.
• Partially improved land loans – For land with limited improvements like roads or utilities. Easier to obtain than raw land loans.
• Improved lot loans – For land parcels with all utilities installed and ready for building. Most affordable option with lowest rates.

Land loans can also be categorized by use

• Residential – For land you plan to build a home on and live in.
• Commercial – For land to be used for business purposes.
• Agricultural – For farmland or ranches.

Land Loan Requirements

Qualifying for a land loan is more difficult than a traditional mortgage. Requirements are stricter since the lender takes on higher risk without a completed structure as collateral. Typical requirements include:

• Down payment – Usually 20-35% of the purchase price. More for raw land.
• Credit score – Minimum of 660, but many lenders want 700+ scores.
• Debt-to-income ratio – Maximum of 43% in total debt obligations.
• Loan term – Often just 1-5 years for land loans vs. 15-30 years for mortgages.
• Interest rates – Usually 0.5 – 1% higher than mortgage rates.

Provide as much detail to the lender as possible about your plans for the land Thorough building plans and financial readiness make for a stronger application

How to Get a Land Loan

You have several options when it comes to getting a land loan:

• Banks – Especially local community banks familiar with land values in the area.
• Credit unions – Offer competitive rates and more flexibility than big banks.
• USDA – U.S. Department of Agriculture loans for building in rural locations.
• FHA – Federal Housing Administration loans require just 3.5% down.
• VA – Veterans Affairs loans offer 100% financing for eligible applicants.
• Sellers – Some sellers offer owner financing for land purchases.
• Home equity loan – Use equity from an existing home as a down payment resource.

Shop around and compare rates and fees to find the best fit for your financial situation. Non-traditional lenders like individuals or land loan specialists can provide financing when banks deny applications.

Pros and Cons of Land Loans

Land loans offer benefits like the ability to build your perfect custom home, but also have some potential drawbacks to consider.

Pros

• Design and build a custom home.
• Potentially purchase land for less than a move-in ready home.
• Investment in a property likely to appreciate over time.
• More flexible financing options for rural properties.
• VA and USDA programs offer zero down payment options.

Cons

• Stricter qualification requirements than mortgages.
• Short 1-5 year repayment terms with balloon payments.
• Higher interest rates than traditional mortgages.
• Complex construction process with potential delays or unexpected costs.
• Difficulty obtaining financing from major lenders.

If you don’t have strong credit, sufficient income, and financial resources for a large down payment, a land loan may be difficult to obtain. Make sure you create a detailed construction budget and find a reputable builder to mitigate risks.

What Does Land Cost?

Land prices vary tremendously based on the location, size, improvements, zoning, and other factors. Some typical costs include:

• Raw rural acreage – $2,000 – $5,000 per acre
• 1+ acre improved lot – $25,000 – $150,000
• 1/4 – 1/2 acre improved lot – $15,000 – $60,000
• Small urban infill lot – $50,000 – $500,000+

Research comps in your desired area to estimate costs. Improved lots with utilities in populated areas generally sell for significantly higher prices per square foot than raw rural land.

Is a Land Loan Right for Me?

If you want to build a fully custom home or develop a land investment, a land loan may be a good fit. Here are a few signs you could benefit from a land loan:

• You have a strong credit score over 700
• You have funds saved for a 20% down payment or more
• You want to build in a rural location near land you own
• You have a solid construction plan and budget
• You don’t need financing immediately to start building

However, land loans are complex products reserved for individuals in strong financial shape. For an easier home buying process, stick to conventional mortgages for purchasing a completed home.

Alternatives to Land Loans

In some cases, a land loan may not be the right solution. Here are a few other options for purchasing land:

• Save up – Slowly accumulate cash savings to buy land outright without financing.
• Owner financing – Find a seller willing to finance the purchase privately.
• Home equity loan – Tap equity from an existing home you own.
• Hard money loans – Asset-based financing from private lenders at higher rates.
• Crowdfunding – Pool money from multiple small investors.
• Partnerships – Join with others to split land costs.

Don’t let a lack of financing deter land ownership dreams. With creativity and persistence, you may find an alternative route that fits your needs.

The Bottom Line

Securing a loan for vacant land can be challenging, but offers big rewards like the ability to build your perfect home from the ground up. If you have strong credit, a budgeted construction plan, and adequate savings, a land loan may be within reach to make your property dreams a reality.