Land loans permit the borrowers to buy acreage or land, usually to build a house there or develop the plot for commercial.
Due to the inherent risk for lenders, land loans can be difficult to get. The rates and down payment are typically more expensive than conventional mortgage loans, and the repayment term is shorter.
Let’s explore land loans and consider other options.
What Are Land Loans?
Land loans (often called “lot loans”) provide financing to buyers looking for land. Buyers might use these loans with the plan to build a house or start their own business. or for recreational activities like hunting and fishing. Developers also rely on land loans to secure property for future housing projects or commercial developments.
A land loan differs from the construction loan, which is generally an in-demand loan for construction or the repair of a house. A land loan is a type of loan that the borrower may not use immediately to construct a house.
Land loans may be more challenging to secure due to a lack of collateral available as protection with which lenders can back them. Lenders might require stricter standards and higher interest rates when lending on land.
Types of Land Loans
The interest rate, loan terms, and down payment required for a land loan often depend on the type of land you’re buying.
Raw Land
Securing funding for raw land in the state isn’t always easy. Land that has yet to be developed – also referred to as unimproved or undeveloped land – remains completely undeveloped, lacking roads, electricity, or water services.
To increase the chances of loan approval, it’s wise to create and present an in-depth development plan to the lender.
Of course, raw land is usually less expensive than land developed. However, because it’s virtually undeveloped so it’s impossible to determine what issues will be in the future when you begin development.
Unimproved Land
They are used for land that has certain basic improvements (like the road’s access) but is still devoid of services or infrastructure. They usually have slightly better terms for raw land loans.
Improved Lands
These loans are offered for land that already has essential utilities in place and is ready for construction. They usually come with the best conditions loans for land that are similar to conventional loans.
Also read: Understanding Home Loan Interest Rates: A Comprehensive Guide
How to Find Land Loan Lenders
Finding a lender for a land loan can be more challenging than securing one for a traditional mortgage. Land buyers who may be interested can test these options to get funding:
Local banks and credit unions.
If your bank doesn’t offer land loans, or you’re having trouble finding a major financial institution that does, you may have better luck working with a local bank or credit union.
Online lenders
Searching the internet lets you evaluate rates for land loans from your couch. Before applying, it’s smart to research and compare other lenders.
USDA loans for low-income borrowers
The U.S. Department of Agriculture provides Section 502 loans directly to aid low- to moderate-income households and individuals buy houses or purchase and build sites, which includes the provision of water and sewage systems in rural regions. The interest rate is much lower than the market rate currently. The period can last as long as 38 years. The down payment is not typically necessary.
SBA Loans
Business owners who want to set up a business can qualify for an SBA 504 Loan through lending institutions that issue them up to 90 percent of the land acquisition costs at market rates. The U.S. Small Business Administration also offers these loans at a similar market rate.
Understanding Land Loan Rates and Repayment Terms
As with any loan, the interest rate will be largely dependent on the credit scores. Due to their increased risk profile and use as collateral, mortgage loan rates tend to be higher for land loans than conventional ones.
What’s the time frame for repayment? Land Loans from banks typically consist of adjustable-rate loans with five-year terms and an end date with a balloon payment at their conclusion. You may not discover a 30-year fixed-rate loan from a financial institution within the Farm Credit System.
The Federal Deposit Insurance Corp. (FDIC) suggests the loan-to-value (LTV) limitations. Lenders may down payment requirements higher than FDIC guidelines.
- For raw land, the FDIC suggests a maximum loan-to-value (LTV) ratio of 65%, meaning borrowers should be prepared to make a 35% down payment.
- If you are developing land, the FDIC suggests the use of a 75% LTV, which means that borrowers have to place 25 percent down.
- For building a single-family or up to four-family home on improved land, the FDIC allows an LTV of up to 85%, meaning borrowers need to put down about 15%.
- If there are no plans to develop the property, both the cost and required down payment are likely to be higher.
If you decide to build a home on the property later, you may be able to refinance the land loan into a conventional mortgage.
Smart Alternatives to Traditional Land Loans
Land loans aren’t the only option to purchase lots. Some Alternatives to land loans could be your best solution:
Construction-to-Permanent Loans
If you intend to build a house in a short time, then this type of loan may be suitable. In the beginning, you’d pay interest-only on the cost of purchasing the land. The loan allows drawbacks until the house is finished, typically 12 months after the closing date. The loan is then converted to an enduring mortgage, often at the same rate.
Your lender may require a down payment of 20 percent of the loan amount. Construction loan interest rates typically surpass traditional mortgage loan interest rates. However, eligible borrowers could qualify for FHA, VA or USDA single-close loans, which combine land purchase costs along with construction expenses into one package loan.
Seller Financing
Although less widely utilized than traditional loans, owner financing refers to any financing method in which an owner serves as both lender and borrower of property. As it’s commonly referred to, land contract financing does not require any credit union, bank, or traditional lenders.
Although less common than traditional loans, owner financing refers to any method wherein an owner of land acts as their lender.
Home Equity Loan or HELOC
If your primary residence has significant equity, securing it with mortgage payments might allow for the possibility of applying for a home equity loan using your home as collateral. Consider applying for a Home Equity Line of Credit (HELOC) or cash-out refinancing to help finance a land purchase.
Many lenders permit loans of up to 85% of today’s plus mortgage balance, though some will allow borrowing beyond this 85% cap.
Many lenders allow homeowners to borrow up to 85 percent of the equity in their home – this refers to its current value minus mortgage balance – from equity loan providers; some may allow more.
Personal Loan
Although personal loan rates could be higher than home equity loans, and you may have to repay the loan over a shorter period and, in some cases, it’s possible to take out a personal loan to fund the purchase of land.
You’ll get the money promptly, and an unsecured personal loan does not require collateral.
Also read: Top 10 Landscaping Business Ideas to Start and Grow in 2025
Key Things to Know Before Getting a Land Loan
Before applying for a loan to purchase land, it’s essential to be aware of land development and the particulars of the area you’re interested in.
Survey
If you’re purchasing large land parcels, locating and marking their boundaries may prove more challenging. Consult a surveyor when applying for loans.
Utilities and Roads
The unspoiled land can be gorgeous. However, it could be difficult to grow. Before embarking upon any land planning or loan applications, you must understand where roads and utilities exist and how accessible they may be to you, along with their respective costs of connection.
Zoning
If you are considering purchasing land, it’s best to study any zoning restrictions in the area. When you purchase land, it is important to know that you can construct on it according to your plans.
Summary UP
Land loans help buyers to purchase land and develop it according to their preferences. Since there is a greater risk to the lending institution, it may be difficult to obtain the right loan for land. Additionally, terms and rates on alternative mortgages tend to be less advantageous than conventional ones.
Cash-out refinancing, personal loans, home equity loans, or seller financing might permit a land purchaser to get paid.
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