Everything You Need to Know About Unimproved Land Loan Rates

As real estate prices continue to climb, more and more people are looking into purchasing unimproved land as an affordable way to invest in property. But financing unimproved land can be tricky. Unlike a traditional mortgage, lenders consider loans for vacant land to be higher risk, which means higher interest rates and stricter qualification requirements.

If you’re considering purchasing a parcel of unimproved land, it’s important to educate yourself on the loan process, interest rates, and steps you can take to secure the best financing. Here’s a comprehensive guide to help you understand unimproved land loans and get the lowest interest rate possible.

What is Unimproved Land?

Unimproved land refers to a parcel of property that is mostly raw and undeveloped, with limited access to utilities or other infrastructure. While it has more amenities than raw land, unimproved land lacks crucial things like an electric meter, phone box, natural gas meter, or sewer access. Common examples include:

• Large acreage in rural areas
• Desert land
• Forested lots
• Land that was previously used for farming/ranching

While cheaper than improved land, unimproved parcels typically don’t have immediate development potential without significant investment into things like grading, utility access, permits, etc. That’s why lenders view these loans as riskier.

Typical Unimproved Land Loan Rates

Due to the increased risk unimproved land loans typically have

• Higher interest rates – Expect rates 0.5 to 3% higher than a traditional mortgage. Rates can vary greatly depending on your credit, down payment, and other factors.

• Shorter loan terms – Most lenders will only approve terms of 1-10 years. Longer terms up to 30 years may be available for borrowers with excellent credit.

• Higher down payments – At least 20-30% down is expected. Some lenders may require up to 50%. The more you can put down the better the rate you can qualify for.

• Higher fees – Unimproved land loans often come with higher origination fees, application fees, and closing costs. Shop around for best pricing.

• Prepayment penalties – Borrowers may face penalties for paying off loan early, Check if your lender charges this,

Always compare interest rates and fees from multiple lenders. Unimproved land loan rates can vary significantly.

What Impacts Your Unimproved Land Loan Rate

When a lender is determining your interest rate for an unimproved land loan, they will assess the overall risk factors including:

• Your credit score and history – The higher your score, the better rate you’ll qualify for. Scores below 620 may not qualify at all.

• Your debt-to-income ratio – Lenders prefer this to be 36% or lower when considering an unimproved land loan. The lower the better.

• Your down payment amount – The more you put down, the less risky the loan is for a lender. 20-30% or more is best.

• The land itself – Parcels in desirable areas with potential for future development appeal most to lenders.

• Your plans for the land – Having concrete plans for improvement/development makes your loan less risky.

• Loan program type – FHA loans typically have lower interest rates than conventional loans.

• Loan term – Shorter loan terms often come with slightly better rates.

The more appealing your situation is to a lender, the better the rate and terms they will likely offer. Shopping around with multiple lenders is key.

How to Get the Best Unimproved Land Loan Rate

If your goal is to secure the lowest rate possible on an unimproved land loan, follow these tips:

• Get pre-approved – Having a pre-approval letter in hand shows sellers and lenders you are a serious buyer. Rates are locked in with pre-approvals.

• Shop multiple lenders – Compare rates and terms from banks, credit unions, and online lenders. Leverage offers against each other.

• Improve your credit – Work on improving your score and having lower debt ahead of time. This can significantly help your rate.

• Make a larger down payment – Putting 30-50% down shows lenders you have skin in the game and lowers risk.

• Choose shorter loan terms – Opt for a 1-10 year term. The shorter timeframe poses less risk to lenders.

• Pay discount points – Paying points upfront can lower your interest rate by 0.25% per point. Calculate if worth it.

• Bring development plans – Showing lenders your concrete plans for improvements can mean better loan terms.

• Add a co-signer – Having a co-signer with better credit/income may improve the rate you qualify for.

• Apply with credit unions – Credit unions offer some of the lowest unimproved land loan rates. Membership required.

The more appealing your loan application is to lenders, the better financing terms they are likely to offer. Do everything possible to reduce perceived risk before applying.

Common Unimproved Land Loan Programs

There are a few common loan programs used for financing unimproved land purchases:

• Conventional loans – These standard loans from banks and lenders tend to have higher rates/fees than specialized programs below.

• USDA loans – For purchasing rural land to build a primary residence on. USDA loans have competitive fixed rates and require no down payment. Not available for investment land.

• SBA loans – The U.S. Small Business Administration guarantees loans which are offered through approved lenders. Beneficial for commercial land purchases but requires good credit and 10-15% down.

• FHA loans – May be used if you plan to build a primary residence within 12 months. More lenient credit requirements than conventional loans but typically have PMI.

• VA loans – For eligible military and veterans. No down payment required and no PMI. Rates are very competitive. Construction must begin within 2 years.

Always compare options, as loan programs vary in their rates, terms, fees, and eligibility requirements. Speak with a lending professional to determine the best fit.

Should You Buy Unimproved Land?

Purchasing an unimproved parcel of land has some advantages over improved land, but also comes with considerable risk.

Pros:

• Cheaper per acreage than developed land
• Opportunity to customize/develop as desired
• Potential for value appreciation over time

Cons:

• Difficulty securing financing with good rates
• No immediate income potential
• Risk of unknown development costs and delays
• Potential zoning/permitting issues
• No guarantees property can be developed as planned

If you have concrete plans backed by research, are comfortable with the risks, and intend to hold long term, an unimproved land loan can be a viable option. But proceed with caution – not all parcels end up being viable investments.

The Bottom Line

Securing competitive financing for an unimproved land purchase is possible if you have excellent credit, a sizable down payment, and strong plans to develop the lot. Expect to put in extra legwork finding the right lender willing to offer you favorable loan terms compared to a traditional mortgage or improved land loan.

With the right prep work and research, you can potentially get loan rates under 5% and reasonable terms to start building your dream property. Just make sure to crunch the numbers carefully and understand the risks before diving in.