What Is a Land Loan and How Do You Get One?

Existing Home Owners, Home Owner Tips, Mortgages

We talk about land loans a lot less than home loans. And that’s not surprising. According to the National Association of REALTORS®, 87% of home buyers buy existing, previously owned homes.[1]

But some life goals may need a piece of land as their launchpad. And there are lots of reasons why someone might buy land, including:

  • Building a house from scratch
  • Investing in real estate
  • Opening (or expanding) a business
  • Starting a farm 

No matter what your goal is, there’s a little piece of the globe waiting for you out there. ?

But before you start exploring land listings, understanding the nuances of land loans can help you purchase a patch of land that fits your needs.

What’s a Land Loan?

A land loan buys you a plot of land that doesn’t have a house or other building on it. 

Land loans can cover any size piece of land, from a tiny, empty lot in the city to thousands of acres in the country (and everything in between).

There are different types of land loans to choose from, based on your plans for the land and its buildability (how ready the land is to be built on).

Compared to home loans, land loans typically come with higher interest rates and require a higher minimum down payment.

The two most common types of land loans are improved land loans and unimproved land loans.

Here’s a breakdown of each:

Improved land loan

An improved land loan (sometimes called a “lot loan”) is typically used for land that is ready to be built on (or close to ready), called improved land. 

Sometimes, however, it might be called improved land just because its zoning has been changed to allow it to be used for residential construction or business purposes.

Zoning Codes

Local governments use zoning codes to control what can be built on specific plots of land. Check before you buy!

Most buyers in the market for an improved land loan are considering sites that have access to most (if not all) utilities, including water, sewer and electricity. The land tends to be easily accessible by car and may even have a building site already cleared and prepped. 

Because it’ll require relatively low effort to build on it, improved land typically costs more than unimproved land. 

But on the flip side, improved land loans usually have more favorable loan terms than unimproved land loans. 

Unimproved land loan

Unimproved land loans (also called “raw land loans”) apply to undeveloped land. 

Sometimes there’s a difference between what people call raw land and what they call unimproved land. When there is a distinction made, it’s usually that there’s literally NOTHING about raw land ready for a build, whereas unimproved land might have something going for it, like a paved road running past it, for example.

The land doesn’t have access to any of the basics you’d need for a home or business. No electricity, no water or gas lines, no driveway. Sometimes it’s not even reachable by road, or … by high-speed internet. ?

Because it may take a lot of effort and money to develop the land (including hiring contractors and getting permits from the local government), unimproved land is relatively less expensive than similarly sized pieces of improved land. 

But an unimproved land loan is often more expensive – and harder to get approved for.

Improved Land Unimproved Land
Might make sense for:

Buyers who are ready to build a house and don’t want to deal with developing the land.

Buyers who can afford a higher purchase price for land.

Might make sense for:

Buyers with good credit and a plan for developing the land. 

Buyers who want to live “off the grid” in a tiny home or cabin.

Investors who want to hold on to the land as its value increases.

Land flippers who plan to improve the land and then sell it.

The lender’s perspective:

An improved land loan is a less risky land loan, but it’s riskier than a home loan.

Lenders typically set the interest rates for improved land loans lower than they do for unimproved land loans. 

Improved land loans have looser minimum down payment and credit score requirements.

The lender’s perspective:

An unimproved land loan is the riskiest land loan that lenders offer. 

Lenders usually set a higher interest rate and higher minimum down payment requirement for these loans.

If the land is nowhere near utility lines or paved roads, interest rates could skyrocket.

What you should consider before buying:

Improved land may have access to utilities and roads, but are all of the utilities you need currently available where the land is located?

Would any environmental land features (a steep slope, a tendency to flood, etc.) make it hard to build on the land? 

What you should consider before buying:

What would necessary improvements to the land cost, like connecting to utilities or removing trees to make room for a building site?

Would city water and sewer lines be available? Would a well and septic field be necessary?

Whether you’re building or investing, does the location make it worth its costs? 

How Do You Get a Land Loan?

The application process for land loans is similar to the one for home mortgage loans. Like a home mortgage loan, you can get preapproved for a land loan before submitting your final application.

Some additional info you may need to include on a land loan application includes:

  • What you plan to use the land for
  • Specific improvements you plan to make on the land

That info, combined with details of the land’s survey and zoning restrictions, will give lenders an idea of the level of risk on the loan. 

To close on a land loan, you’ll need to make a down payment of around 10% – 20% of the land’s purchase price and typically pay around 2% – 5% in closing costs. But keep in mind that the higher the loan, the higher the fees. And that could make your closing costs higher. 

Put together a detailed budget, and keep your financial records organized before you reach out to a lender.

Finding a lender for a land loan can take a little more effort than finding a lender for a home loan. The truth is fewer lenders offer land loans. 

It’s not impossible to find a lender. It just means that you’ll need to spend more time researching. 

Who Can I Get a Land Loan From?

A good place to start is with a lender or financial institution that you already have a home loan or bank account with.

Besides that, here are some of the more common sources for land loans:

Local banks and credit unions

Local banks and credit unions are usually more willing than national financial institutions to take on the risk of a land loan. The loan officers at a local bank or credit union may also understand the local market better, which may translate into better loan terms for the borrower.

The Small Business Administration (SBA)

SBA 504 loans are for buyers who are interested in buying land for business use. The loans offer low, fixed interest rates and can fill in the finance gap when the borrower can’t find a traditional lender willing to lend the full amount for the land.

The United States Department of Agriculture (USDA)

USDA loans help people start their own farms with USDA loan and grant programs that specifically target farmers. USDA construction loans, called single-close loans, are designed to help people buy land in a qualifying rural area and build a house on it.

What lenders factor into land-loan decisions 

Say that five times fast. ? 

Here’s what lenders look at when they’re deciding if they should offer you a loan (and what the loan terms should be):

Knowing everything you can about these factors before you speak to a lender can help your loan application process go as smoothly as possible – and it may even get you better loan terms.

For example, if a lender requires a 20% down payment on a land loan for borrowers with credit scores below 720 – but requires a 10% down payment for those with higher credit scores – a borrower with a score of 700 may decide to put off buying any land until they’ve boosted their score to 720 or higher.

What Are Other Ways To Finance a Land Purchase?

Some land buyers prefer to finance their purchases without a land loan. Some alternatives allow borrowers to pay less in interest and even avoid a down payment.

Here are some common methods for buying land without a land loan:

If you own a home, a home equity loan could do the trick 

For homeowners with a mortgage loan, a home equity loan allows you to borrow a large portion of your available home equity to pay for anything you want – even land!

A home equity loan can help borrowers get a lower interest rate on their land loan and avoid having to make a down payment. 

To qualify for a home equity loan, most lenders require the borrower’s home equity to be over 20% of the fair market value of the home. Lenders won’t allow you to borrow against that first 20% of home equity. You can only borrow against the amount of equity you own beyond that.  

If you don’t own a home, you could try seller financing

Seller financing is sometimes a more affordable option than a land loan. 

Seller financing is when the owner of the property becomes the lender and loans the buyer the money they need to buy the land. The loan comes complete with repayment terms, interest rate and required down payment.

The seller is responsible for typing up the terms of the loan in a promissory note. The note serves as the contract for the land purchase. It’s what the buyer and seller sign to seal the deal. 

Because land can take longer to sell than a house, some sellers will finance the purchase if it means getting the sale done. Sellers may also be more flexible with the loan terms than a traditional lender.

Landing the Right Loan

Land loans tend to be harder to come by and a little more expensive than home loans. But if the price of the land AND the land loan is right, it could be a helpful step toward an important goal. 

Whether you’re looking for the perfect place to build your home or your brick-and-mortar business or you’re looking at land as an investment – a land loan could be a good option for you. 

Take a good look at what’s out there. Identify the best loan (and terms) for you. Then claim your land and plant a flag into your future. ?

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