Who Does Land Loans? Your Guide to Finding the Right Lender

Buying vacant land to build a home or start a business on can be an exciting prospect But land loans work differently than traditional mortgages, so you’ll need to find the right lender In this comprehensive guide, I’ll explain exactly who offers land loans and how to get the financing you need.

What is a Land Loan?

Also called a lot loan, a land loan allows you to purchase a vacant plot of land. These loans are secured by the land itself

Land loans have shorter repayment periods than mortgages usually 2-5 years. And they often come with a large balloon payment at the end.

Because not all lenders offer land loans, they can be harder to find than a regular home loan. You’ll generally need to make a larger down payment and have a higher credit score as well.

Types of Land Loans

There are a few main categories of land loans:

• Raw land loans – For completely undeveloped land with no utilities or infrastructure. Requires the largest down payment, typically 35%.

• Unimproved land loans – The land may have some basic infrastructure but lacks utilities. Down payment is usually around 25%.

• Improved land loans – Land that has access to roads, electricity, water, etc. The lowest down payment option at 15%.

Who Offers Land Loans?

You have several options when it comes to finding a lender for your land loan:

Local Banks and Credit Unions

Community banks and credit unions are often your best bet for getting a land loan, especially if they are located near the property. Local lenders will understand the land values in the area.

I’d recommend starting your search for a land loan with banks and credit unions in the county where the land is located. Build relationships and shop around to compare options.

Mortgage Lenders

Some large national mortgage lenders like Quicken Loans do offer land and lot loans. These lenders have more rigid requirements, including high credit scores and down payments. But they can be an option if you don’t have luck with local banks.

Specialty Lenders

There are companies that specialize specifically in land loans and land financing. For example, Southeast Land Finance offers land loans in Alabama, Georgia, Florida, South Carolina, and Tennessee.

Specialty lenders like this cater to land buyers and will have more flexible requirements. They’re a good option if you’re having trouble qualifying with local banks.

USDA and SBA Loans

Certain government-backed loan programs can help you buy land in specific circumstances:

• USDA Loans – For purchasing rural land to build a primary residence on. Offer low rates and sometimes no down payment.

• SBA Loans – For business owners buying land for commercial use. Rates and terms vary.

Seller Financing

Some land sellers may be willing to finance the purchase directly, having you repay them over time instead of going through a bank. This avoids lender qualifications but carries some risks. Make sure you get all terms in writing.

Land Loan Requirements

While specific requirements vary by lender, there are some general qualification standards for land loans:

• Down payment – Typically 15-35% depending on the land. The more undeveloped, the larger down payment needed.

• Credit score – Most lenders look for at least a 680 credit score, with 700+ ideal. The higher your score, the better.

• DTI ratio – Your total debt-to-income ratio should be below 43% in most cases. The lower the better.

• Income – There usually isn’t a set minimum, but most want stable income to comfortably afford the loan.

• Intended use – Being clear on your plans for the lot helps reduce risk for lenders.

How to Improve Your Chances

If your finances are less than ideal for a land loan, there are a few things you can do to boost your odds of approval:

• Make a larger down payment, even up to 50% of the purchase price. This reassures lenders.
• Work to increase your credit score and lower your debts. This improves DTI.
• Get pre-approved for the loan amount you need. It shows you’re serious.
• Provide detailed plans for developing the land. This reduces uncertainty.

Patience is key. Take time to improve your financial profile rather than rushing into a purchase you can’t afford.

What Does the Process Look Like?

Here are the basic steps to obtain financing and close on your land loan:

1. Find the property and make an offer – Once your offer is accepted, the buying process starts.

2. Choose a lender and apply – Submit your loan application and all required documents.

3. Get approved – After reviewing your info, the lender will issue a loan approval letter.

4. Make your down payment – You’ll need to provide the down payment funds to secure the loan.

5. Close on the loan – Finally, sign all the closing paperwork and the property is yours!

6. Make your payments – Repay the loan on schedule to avoid going into default.

It’s wise to consult a real estate attorney during the land buying and financing process. An attorney can review the purchase contract, loan terms, title work, etc. to protect your interests.

Pros and Cons of Land Loans

Land loans offer benefits like the chance to build your dream home from the ground up. But there are some potential drawbacks to weigh as well:

Pros

• Ability to fully customize your new construction
• Potentially cheaper than buying an existing house
• Land may appreciate in value over time
• Flexible financing options like seller financing

Cons

• Higher interest rates than mortgages
• Large down payments required
• Short repayment periods with balloon payments
• Risk of construction delays or cost overruns

Carefully consider all your home buying options before deciding if a land loan is right for your situation.

Alternatives to Land Loans

If you don’t want to take out a land loan, here are a couple other ways to buy vacant land:

• Cash purchase – Paying the full purchase price in cash avoids financing. But you must have sufficient funds.

• Owner financing – The seller handles the financing. But this requires finding a willing seller.

• Home equity loan – Tap your home equity to buy land. Lower rates but you risk your home.

Finding the Right Land Loan Lender

The key to success with a land loan is finding the right lender for your specific situation. Local banks and credit unions are a good starting point, but also consider specialty lenders, seller financing, and improving your financial profile.

Patience and persistence are crucial when seeking out a lender who will work with you. But with the right financing, you can purchase your dream lot and build the perfect home or business.