Land Loan: Everything Buyers Need To Know

Are you considering purchasing a plot of land? Whether you’re looking to build a home or a business from the ground up, purchasing land offers the creative capacity to make your wildest dream a reality. Working from a blank canvas is a great way to have creative control over your vision, but how would you finance a lot?

What Is A Land Loan?

A land loan, as the name suggests, is a loan designed to help you finance a piece of land. Sometimes referred to as a “lot loan”, these finance options are perfect for borrowers looking to build a home or business from scratch. There are several types of land loans, but the one you choose will depend on when you borrow and what you intended to use the lot for.

Types Of Land Loans

Let’s take a look at the three types of land loans.

Raw Land Loan

Raw land is another term used to describe undeveloped land. Raw land is a vacant lot, usually in a rural area, with no public utilities, buildings or paved roads. This land type is usually the most affordable and is a great option for people looking to build completely from scratch.

To increase your odds of getting a raw land loan, it’s important you have a solid, detailed plan for how you want to develop the property. Doing so will show lenders that you’re committed to the project and that you have an understanding of the time, money and effort that goes into building in such an area. You can also increase your odds by putting down at least 20% and having a credit score north of 600.

Unimproved Land Loan

Unlike raw land, unimproved land has previous development. It will generally have access to paved roads and will often have utility hookups. This means that you will be able to hook up to the main utility services, but you’ll still need to install your own electric meters, communication boxes and gas meters.

Borrowers will still generally need to put down at least 20% and have a strong credit score. However, these loan types generally have lower interest rates than raw land loans.

Improved Land Loan

In contrast to the aforementioned options, improved land typically has utility services readily available. However, these plots are usually controlled by zoning laws, meaning you’ll be limited on what you build and how you will use the structure.

Again, borrowers have a better chance of getting an improved land loan if they put down at least 20% and have a credit score north of 600.

The Pros And Cons Of Loans For Land

Before jumping into a land loan contract, you should definitely consider the pros and cons.

Pros

A few pros associated with using a land loan include:

• Borrowers can build a house or business on their property that meets their specific business or personal goals. From dream homes to profitable businesses, land loans can help people build a better future.
• Government programs can provide land loans at low interest rates with a minimal down payment.
• In some areas, buying land and building might be more affordable than purchasing a previously owned house.

Cons

All things good also have their disadvantages. A few drawbacks to getting a land loan include:

• Land loans are riskier than home loans for lenders since a house isn’t being used as collateral. This means lenders often need to mitigate that risk with higher interest rates, higher down payment minimums and stricter loan approval requirements.
• Not all lenders offer land loans.
• Some people choose to use their primary residence as equity to secure a land loan. However, this can result in someone losing their home if they can’t make the payments on their land loan.
• The process can be cumbersome, with tasks like surveying and zoning reviews needed for a land loan. These tasks aren’t needed with a traditional mortgage.

How To Get A Loan For Buying Land

The steps to obtaining a land loan for a primary residence and a commercial property will vary. Each situation is different, but here are a few of the steps you should take when trying to get approved.

1. Check Your Finances 

Prior to applying for a land loan, be sure to check your finances. Do you have at least 20% of the property’s sale price to put down? Have you decided how you’ll finance the cost of construction? You should also consider looking at your credit score, assets and overall plan for development. Before you make the leap, crunch the numbers to ensure you can afford the land itself and the structure you plan to build on it.

2. Decide On The Type of Lot

You’ll also need to determine what type of lot to buy. If you’re looking to build a business, for instance, purchasing raw land may not be the best option due to its remoteness. Or, if you’re building a home, you may consider things like commute times and proximity to resources. It’s important you sit down and create a plan before you decide the best place for your structure to be built.

3. Search For Land To Buy

Now that you’ve decided what kind of lot you want and how much you can afford, it’s time to find a piece of land. Consider using a real estate agent to find the best place to build your new home. You can also browse the web or drive around looking for plots for sale, though using an agent can simplify the process.

4. Secure A Loan To Buy Land

After you’ve found the land you want, you can apply for a land loan. The process of applying for land loans is similar to conventional mortgage loans. Once you find a lender who offers land loans, you’ll need a down payment and solid credit score to be approved. You will not, however, be required to purchase insurance for the plot. Also keep in mind that land loans are separate from construction loans. If you need financing for the actual development of your land, you’ll need to find a lender that offers construction loans.

Other Land Purchasing Options

If a land loan doesn’t seem like a suitable option, there are other financing options for you to consider.

Home Equity Loan

If you currently own a home, you may be able to leverage your home’s equity to purchase land. If you’re comfortable with using your home as collateral, a home equity loan could help you finance a plot. Keep in mind that home equity loans are a second mortgage, so you’ll have to start making two monthly payments. If you default on your payments, you risk losing your home.

Seller Financing

Although uncommon, you may be able to use seller financing to pay for your land. If you find a willing seller, you may be able to arrange a contract agreement where you pay them in monthly installments until the plot is paid off. 

Land Loans FAQs

Still have questions about land loans? A few commonly asked include the following:

Is it difficult to get a land loan?

The process of getting a land loan is different than applying for a mortgage. In addition to filling out an application, borrowers are sometimes asked to provide a land survey and additional information about their future plans to their lender for consideration.

To show lenders you’re serious about purchasing land, you’ll likely need a well thought out plan of action, 20% to put down and a very good credit score.

Is owning land a good investment?

Depending on the area and your plans for development, owning land means owning an asset which may grow in value.

How do I finance a land purchase?

A land loan allows you to finance a land purchase. A construction loan will help you finance development.

The Bottom Line: Consider Whether A Loan To Purchase Land Is Right For You

Purchasing a plot of land comes with pros and cons, so it’s important you think it through and crunch the numbers before making the jump. While you’ll have the creative freedom to build your dream home or business from the ground up, land loans can be hard to obtain.

Furthermore, land development takes time, patience and persistence – so be sure you’re in it for the long haul. Owning land can be a great investment, so long as you leverage it well, so be sure to take your time when considering what kind of land you’ll purchase and what you’ll do with it.

If you’re ready to start looking for a plot of land, you should get help from a real estate agent to secure the best land loan terms.