What Banks Provide Land Loans? Everything You Need To Know

Buying vacant land to build a home or business on can be an exciting prospect. But most people need financing to be able to afford the land purchase. That’s where land loans also called lot loans, come into play. But not every mortgage lender offers these specialized loans. So what banks provide land loans?

Land loans allow you to buy a vacant plot of land, even if you don’t have immediate plans to build on it. They function similarly to traditional mortgages, but generally have shorter repayment terms and stricter eligibility requirements.

I’ll provide an overview of land loans, discuss the types of lenders that offer them, and go over the loan process and eligibility criteria. Read on to get the information you need to find financing for your land purchase

What Are Land Loans?

A land loan is a loan used specifically to purchase vacant land, either raw land with no improvements or partially developed land. Land loans allow you finance the land purchase separately from the construction of a home or other building.

With a land loan, you can buy land now even if you don’t plan to build right away. Or you may want to buy land as an investment, with plans to sell it for a profit later

Land loans have some key differences from traditional mortgages:

• Shorter terms: Usually 2-5 years.
• Higher rates: Due to increased risk for the lender.
• Larger down payments: Often 20% or more.
• Balloon payments: A large payment due at the end to pay off the balance.

Once you’re ready to build, you would normally need to qualify for a separate construction loan or rebuild your home loan. Or you may be able to refinance your land loan into a conventional mortgage.

Now that you understand the basics of land loans, let’s look at the types of banks and lenders that offer them.

What Types of Lenders Provide Land Loans?

You’ll typically have the best luck finding land loans through these types of lenders:

• Local banks: Community banks and credit unions are often your best bet, especially those located close to the land you want to buy. They will understand the local land values.

• Farm Credit lenders: Specialty lenders like Farm Credit institutions offer land loans for agricultural properties.

• Mortgage companies: Some national lenders and mortgage companies also offer land loan programs.

• Government lenders: Certain government-backed loans can help finance land, like USDA loans and VA loans.

Bigger banks and online lenders are less likely to offer land loans. And because not every mortgage lender provides them, you may have to shop around to find land loan options.

Now let’s walk through the process of obtaining a land loan.

How Do Land Loans Work? The Loan Process

The process of getting approved for and closing on a land loan is similar to a traditional mortgage:

1. Find the land and make an offer

Once you find the vacant land you want to buy, you’ll make an offer and negotiate a purchase price with the seller.

2. Choose a lender and apply for preapproval

Shop around for a lender that offers land loans and apply for preapproval. Preapproval will verify you meet the lender’s eligibility criteria.

3. Finalize loan details if your offer is accepted

If your offer is accepted, you’ll work with the lender to finalize the interest rate and other loan details specific to the purchase.

4. Make a down payment & close on the loan

At closing, you’ll provide the required down payment and sign the final loan paperwork.

5. Make payments over the loan repayment term

You’ll make monthly payments on the land loan over a shorter repayment term, usually 2-5 years.

Now let’s explore the eligibility requirements most lenders have for approving land loans.

Land Loan Eligibility: What Do You Need to Qualify?

Land loans have stricter eligibility criteria than conventional mortgages. Requirements vary by lender, but often include:

• Higher credit score: Typically 700 or above.

• Lower DTI: Usually a max of 43%.

• Larger down payment: Often 20-35% or more, depending on land type.

• Shorter repayment term: Often 2-5 years.

• Loans for personal use: Investment land loans are harder to obtain.

Meeting these standards will give you the best shot at getting approved. But exact qualifications depend on the individual lender.

For specific land loan programs, there may be additional requirements:

• USDA loans have income limits and rural location requirements.

• VA loans are for eligible military borrowers.

• FHA loans require you to build and live in the home as your primary residence.

What Should You Look For in a Land Loan Lender?

Once you’ve decided to move forward with a land loan, how do you choose the right lender? Here are a few key factors to consider:

• Interest rates and fees: Compare to find the most affordable loan options. Ask about any origination fees.

• Loan amounts: Make sure the lender finances loans in the amount you need for your land purchase.

• Terms available: The term length affects your payment amount. Make sure available terms work for your budget.

• Reputation and reviews: Look for an established lender with positive customer feedback.

• Customer service: You want a lender who is responsive and makes the process easy.

Shopping around and comparing multiple lenders can help you find the best land loan for your needs and budget.

What Are the Pros and Cons of Land Loans?

Land loans come with unique advantages, but also some downsides to weigh:

Pros:

• Finance land purchases separately from construction.

• Build on your schedule when the timing is right.

• Potentially pay closing costs just once if you refinance later.

• Opportunity to build your dream home or ideal business location.

Cons:

• Often have higher rates than conventional mortgages.

• Getting approved is more difficult with stricter criteria.

• Short repayment terms mean you’ll need to refinance sooner.

• Raw land may not be buildable or have access to utilities.

What Are Some Alternatives to Land Loans?

If you decide a land loan isn’t the right fit, here are a few other options for financing a land purchase:

• Construction loans let you buy and build in one loan, but require starting promptly.

• Home equity loans leverage your home equity to access funds, if you have sufficient equity.

• Home equity lines of credit (HELOCs) allow you to access equity over time.

• Seller financing involves the seller providing financing for part or all of the sale price.

• Crowdfunding sites like Kickstarter allow individuals to contribute money to a real estate project.

Carefully compare all your options to find the best financing solution for your land acquisition and future building plans.

Final Thoughts on Land Loan Lenders

Purchasing vacant land can allow you to eventually build your dream home or business facility. And land loans provide a financing option to buy land without immediately building on it.

Local banks, farm credit lenders, and government loan programs are options for obtaining a land loan. You’ll typically need pristine credit, a substantial down payment of 20% or more, and a short 2-5 year repayment term.

Review your options carefully, as land loans come with pros and cons. And shop around to compare multiple lenders and loan offers. This will help ensure you find the ideal financing plan to buy land and make your future construction dreams a reality.