Getting a Rural Land Loan in California: A Guide for First-Time Buyers

California is home to some of the most expensive real estate in the country. For many first-time homebuyers especially those looking to purchase land in rural parts of the state financing can be one of the biggest hurdles to overcome. That’s where rural land loans come in.

Rural land loans are a type of mortgage designed specifically for purchasing vacant land or raw land in rural locations. They provide an affordable financing option that can make buying rural property attainable even with lower income or credit scores.

In this article, we’ll walk through everything you need to know about getting a rural land loan in California, including:

• What is a rural land loan and how does it work?
• Who offers rural land loans in California?
• What are the requirements and eligibility for these loans?
• How much can you borrow with a rural land loan?
• What is the process for applying and getting approved?
• Tips for finding the best rural land loan lender

What Are Rural Land Loans and How Do They Work?

Rural land loans, sometimes called raw land loans, are mortgages that allow buyers to finance vacant land in rural areas. They work similarly to a traditional mortgage, but have some key differences:

• Purpose – Rural land loans can only be used for purchasing vacant land. You cannot use them to buy land with existing residential or commercial structures.

• Land use – The land must be zoned for residential agricultural or recreational use. Loans usually cannot be obtained for commercial land.

• Loan terms – Rural land loans typically have longer repayment terms of 10, 15, or 30 years. This helps keep payments affordable.

• Interest rates – Interest rates are usually slightly higher than conventional mortgages, but still competitive. Rates vary by lender.

• Lower LTV ratios – Loan-to-Value ratios on rural land loans are lower, usually 50-60% LTV This means you need a larger down payment

• Collateral – The vacant land itself serves as collateral for the loan. No existing structures are used as security.

Overall, the process of applying for and obtaining a rural land loan is similar to a conventional mortgage. The main advantage is that these loans expand financing options for vacant land, which is often difficult to finance.

Who Offers Rural Land Loans in California?

There are several options for getting a rural land loan in California, including:

• Banks and credit unions – Many national lenders like Bank of America and smaller local institutions offer land loans. Credit unions are also a good option.

• Mortgage lenders – Online mortgage lenders like loanDepot and Guaranteed Rate have land loan programs available in California.

• USDA – The U.S. Department of Agriculture has a Rural Development program that provides rural land loans with low fixed rates and up to 100% financing.

• Land developers – Some developers offer seller financing for land they have for sale. This can be a good option but read the terms closely.

Shopping around and comparing interest rates, fees, and eligibility criteria from multiple lenders is key to getting the best rural land loan. USDA loans offer unique advantages for low-income buyers but have limited availability.

What Are the Requirements and Eligibility for Rural Land Loans?

To qualify for a rural land loan in California, you’ll need to meet these basic requirements:

Down payment – Most lenders require a down payment of 20-40% for a rural land loan. USDA loans are an exception and offer zero down payment options.

Credit score – Minimum credit scores range from 620 to 700 depending on the lender. USDA has no minimum score but looks at your entire credit history.

Debt-to-income ratio – Your total monthly debt payments, including the new loan, must not exceed 43-50% of your gross monthly income depending on the lender.

Appraisal – The lender will order an appraisal to ensure the property is worth at least the loan amount.

Legal access – The land must have legal physical access through a public road or an easement.

In addition to these standard requirements, your income, assets, and land parcel itself must meet eligibility criteria:

• Household income limits apply for USDA land loans only.
• The land can be no larger than 20 acres in most cases. Larger parcels may be allowed by some lenders.
• The land must be zoned properly and compatible with program rules of each lender.
• Properties with existing buildings or other structures are generally ineligible.

Meeting these requirements upfront will help ensure a smooth application process.

How Much Can You Borrow With a Rural Land Loan?

Loan amounts on rural land loans typically range from $40,000 to over $1 million. The amount you can qualify to borrow will depend on:

• LTV ratio – Loan-to-value ratio caps set by the lender limit the maximum loan amount.
• Your income – Your income, assets, and existing debts impact the loan size you may qualify for.
• Appraised value – The appraisal value sets the upper limit for the loan amount.

For example, if a lender has a maximum LTV of 60% and you purchase land appraised at $100,000, the maximum loan would be $60,000.

Some lenders set minimum loan amounts as well, usually between $40,000-$50,000. Shop multiple lenders to find the best loan amount for your budget and property value. USDA has no maximum loan limits and can finance 100% of the appraised value.

What Is the Process for Applying and Getting Approved?

The application process for rural land loans in California follows these typical steps:

1. Check eligibility. Confirm the property meets location, zoning, and other rules for the lender. Also gather documents needed to apply.

2. Choose a lender. Compare interest rates, terms, fees, and eligibility criteria from multiple lenders.

3. Submit your application. Complete the lender’s application forms and provide required financial documents. Pay any upfront fees.

4. Allow property appraisal. The lender will order an appraisal to verify the property value supports the loan amount.

5. Receive loan decision. After reviewing your appraisal, eligibility, and credit, the lender issues a loan decision within 1-2 weeks.

6. Close on property. Once approved, close on the land purchase within the lender’s allowed timeframe.

The approval process takes 30-60 days. Having your financial paperwork ready and shopping lenders upfront can help expedite the process.

Tips for Finding the Best Rural Land Loan Lender

Choosing the right lender is key to getting the best rural land loan for your needs and budget. Here are some helpful tips:

• Get rate quotes from national and local banks, credit unions, and mortgage lenders to compare options.

• Ask about discounts for a down payment over 25% or excellent credit. This can lower your interest rate.

• Inquire if the lender offers both land purchase and future construction loans. This streamlines financing.

• Ask about flexibility on loan terms, fixed vs adjustable rates, and fees to match your financial plans.

• Consider lenders familiar with rural properties values and zoning in your county.

• Check reviews and the Better Business Bureau rating of any lenders you’re considering.

• For low rates and flexible credit, ask your state USDA office about land loan eligibility.

Finding the right loan product with the best interest rate and terms for your situation will help you get approved and keep financing costs low.

Rural Land Loans Can Make Financing Your California Property Possible

For many first-time home buyers and retirees looking for land outside metro areas, rural land loans provide an attainable way to buy and start building on vacant property. Using the tips in this guide, review your options, choose a reputable lender, and get pre-approved to make your California land ownership dreams happen.