If you want to buy land that doesn’t already have a building on it, you’ll need a land loan. Land loans have a number of differences from mortgage loans used to buy real estate with an existing home or other building.
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What Is A Land Loan?
Lenders generally see it as riskier to loan money to buy land that doesn’t already have a building on it or that you don’t plan to build on. For this reason, fewer lenders are willing to make land purchase loans.
Lenders that do make land loans are liable to ask for bigger down payments, higher fees and shorter times to repay the loan. They also are likely to want you to have a better credit score than a traditional mortgage lender. And you may be asked to put up additional collateral.
Your plans for the property also make a difference in how easily you’ll be able to get a land loan. Land that you plan to build on soon is easier to get a loan for than land you don’t plan to develop or build on soon. With a land loan, you can buy:
- Vacant lots already developed and ready to build on
- Raw land without lots, roads, streets or utilities
- Agricultural land for farming or ranching
- Recreational land suitable for hunting, sightseeing or vacationing
- Timber and mining land with natural resources
- Land for producing energy through wind, solar or other means
Land Loans Vs. Regular Mortgages
If you’ve already gotten a conventional loan to purchase land with a home or commercial building on it, you’ll find land loans are different. You’ll often go to different lenders. It is also harder to qualify for a land loan.
One major difference is that the Federal Housing Administration (FHA), which backs many home mortgages, does not back loans just to buy land. Nor does the U.S. Department of Veterans Affairs (VA).
Both these government-backed lending programs do make construction loans, however. These buy-and-build loans may be used to buy land and then pay to build homes on the property.
Here are other major differences between regular mortgages and land loans:
- Down payment: You may be asked to put down 30 percent to 50 percent of the purchase price.
- Term: You may be asked to pay the loan back in five to 10 years.
- Balloon payment: Although monthly payments may be the same amount as a 15- or 30-year mortgage, at the end of the term you may have to make a balloon payment of the remaining balance.
- Interest rates: You may be asked to pay higher interest rates, since lenders see these loans as riskier.
- Income: If the land won’t be used to produce income, you may need more personal income and a lower debt-to-income ratio to convince lenders you can make the payments.
- Credit score: Without any government-backed lending programs available, and with lenders seeing land loans as riskier, you will need a better credit history than it would take for a similar mortgage.
Tip: Lenders are more willing to make land loans for smaller loan amounts. If you have trouble getting a loan, consider a smaller or less expensive parcel to reduce the amount you need to borrow.
Where To Get Land Loans
While some important loan programs can’t be used to buy land, there are several places you can get a land loan.
Local Financial Institutions
Banks, credit unions and savings and loans in the town or region where you plan to buy land are probably the first places to look. They know local market conditions, but may prefer lending to local residents.
It may be possible to get a regular mortgage on a property with an existing building that you plan to tear down. This can let to acquire vacant land without some of the limitations and hassles of a land loan. You’ll have to budget for demolition costs and tell the lender you plan to demolish the building.
USDA Loan
The U.S. Department of Agriculture will back loans to buy land in designated rural areas if the land will be used to build a single-family, owner-occupied home. The program is intended for low- to –moderate-income families and operates like the FHA and VA construction loan programs.
SBA Loans
The U.S. Small Business Administration (SBA) has two loan programs that may be used to buy land:
- SBA 504 program can be used to buy land to build a facility housing a qualified small business. These loans are administered by a local Certified Development Company, which provides part of the financing.
- SBA 7a loans can be used to build land for commercial real estate or for other uses. These loans may give you a longer term, up to 25 years, to pay back the principal.
The SBA website can help you find a lender for a both 7a and 504 loans.
Seller Financing
Raw land is harder to sell than land with a building on it. So the owner of the land may be willing to finance the purchase in order to get it sold.
An owner self-financing a sale of land may want a large down payment and short repayment term, like other lenders. But the loan application will be simpler and you may be able to save on closing costs.
Land company financing is a kind of financing some real estate brokers may offer to make it easier to buy the land they’re marketing. If you’re buying through a broker, ask about financing.
Home Equity Loans
If you have equity in your home, you can borrow against it for any purpose. That includes buying land for building or investment. A home equity loan you won’t need a down payment you’ll get better loan terms and a lower interest rate than other land loans.
The downside of a home equity loan is that you risk losing your home if you can’t repay the loan. If you are buying land and plan to build on it, ask your builder for a referral to a lender. Custom builders may have relationships with financial institutions willing to make lot loans.
Land Loan Downsides
Buying land can open up lots of opportunities. It can let you custom-build the exact home you want. You can also invest in raw land that you think will appreciate in value, or buy land that can produce income from agriculture, forestry or energy generation.
Land loans also come with some risks, including:
- Zoning: Whatever you plan to do with the land, make sure it has the appropriate zoning. Otherwise, you may find your intended use is prohibited.
- Survey: Owners self-financing a land loan may be willing to skip the survey but you should still get one to make sure.
- Title: Seller financing may also let you save money by not doing a title search but, again, it’s wise to pay for this.
Should You Get A Land Loan?
Land loans are harder to get, have less favorable terms and cost more than conventional mortgages. But you’ll generally need one to buy land that doesn’t already have a building on it. And loans are available if you know where to look and have the right borrower profile.
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