Land loans are often required to purchase vacant land. However, this can be an exciting prospect. A land loan is a financing option that can be used to purchase a plot. It can be obtained through a bank, lender, or broker who will assess your credit history and determine if you are eligible.
Lenders are concerned about land loans because there is no collateral to support the loan. To secure a loan to purchase land, it is important to be ready for a higher downpayment and a higher interest rate.
How to obtain a Loan for Land?
A land loan can be obtained in the same way as a traditional mortgage. The different types of land loans come with different qualifications. However, you will need to have excellent credit and a good debt-to-income ratio (DTI) of around 30% to 40%. You also need consistent income.
Why are there strict qualifications? The land is a more risky investment than constructed property. Land loans are typically short-term and two- to five-year loans that are followed by a balloon repayment. This is in contrast to the standard 15- to 30-year terms for a home mortgage. You may be able to get a longer-term if you plan to build your home on the land.
Different types of Land Loans
The process and options available to obtain a loan will vary depending on where and for what purpose you are buying the land. We will explain below the most common types of land loans and how to purchase land.
1. Raw land loan
Raw land is land that has not been cultivated or has no improvements such as a home, or any other built elements. It can be attractive because it is cheap and allows you to do whatever you want with it according to local laws. Raw land is riskier than other types of land, as it takes longer to develop. It may be easier to obtain a loan for raw land if you have a solid plan of development, great credit, and a large down payment (sometimes up to 50%).
2. Hunting Land Loans
Hunting land loans can help you build the hunting camp of your dreams! Hunting land loans are a fantastic way to start a career in hunting. These loans are offered by a range of lenders and can be utilized for a number of things, including getting a hunting lease, buying land, or even starting a hunting business.
3. Loan for a Lot of Lands
Lot land is not like raw land. It has infrastructure such as electricity, and water and is often zoned for residential construction within developed areas. Lenders are more likely to offer lot loans than raw land because upfront costs are usually lower. This is a benefit of lot land. You will still need to make a 10%-20% down payment and terms can be extended up to 20 years.
4. Construction loans
A construction loan is a loan that’s intended to finance construction costs. Contrary to a conventional mortgage, a term for a construction loan is only as long as the construction process, before it can be converted into a standard 15 or 30-year mortgage. Once the loan is approved, the lender will pay each member of the construction team for their work.
Construction loans are subject to more risk and variables than home construction. They typically require at least 680 credit scores or higher, a 20% down payment, detailed project plans, a budget and schedule, and a detailed plan. It may seem overwhelming, but a high credit score and low DTI ratio can help you get a better rate on your construction loan.
Interest rates for land loans
Land loans can be risky for lenders so land loan rates are usually higher than home mortgage interest rates. Higher credit scores and lower DTI ratios are likely to be eligible for lower rates.
Rates for land loans based on property type and loan term
| Types of Land | Fixed For 10 years | For 15-year term | Fixed For 20 years | For 30 years |
| Lot Land | 4%-5% | 4.30% – 5.30% | 4.60% – 5.60% | 4.65% – 5.65% |
| Raw/Recreational Land | 4.25% – 5.25% | 4.55% – 5.55% | 4.85% – 5.85% | 4.90% – 5.90% |
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How to choose the Right land Site?
Lenders are more likely to finance projects that are less risky, cheaper, and simpler. These factors could help you get a loan for land:
1. Surveying and defining boundaries
A survey is essential to avoid legal problems in the future. It also gives you a clear picture of what land you will own. To ensure that you are aware of the boundaries of the land, you will need to conduct a survey prior to purchasing it. A majority of lenders will require an American Land Title Association (ALTA), boundary survey to approve a loan.
2. Utilities
Make sure the land is connected to water, electricity, sewage, and paved roads. Most land has these utilities, but if you are missing them or buying raw land, make sure you have the budget, permits, and space to do so. Also, ensure you abide by all local and state ordinances and codes.
3. Zoning and restrictions
You will need to check the zoning to allow you to legally finish your project, depending on your plans. For example, if you are buying land for the purpose of building a home, make sure it is zoned for residential purposes. You should also research any special rules that may apply to your land, and what you are allowed and not permitted to do.
4. Environment and wildlife
Make sure you do your research before building on any land that is not protected by the U.S. Fish and Wildlife Service to protect endangered species of wildlife and plants. States often maintain long lists of endangered animals and plants.
This could be good news, as you might qualify for grants from the government to help endangered species, reduce harm, and support the environment while construction is underway. You should always be aware of environmental issues so that you can plan accordingly.
5. Future changes
Do you know of any construction projects near your land, such as a school, highway, or shopping mall? The construction of new facilities can have an impact on the value of your land, so make sure you include these considerations in your planning.
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