Land Loans: Everything a Buyer Needs To Know

Land loans can help you buy property without any structures on it, especially when you don’t have immediate plans to build on the land. Whether you’re planning to build your dream house someday or buying a new location for your business, you might need a land loan to make it happen.

We’ll go over the basics of land loans, how they work and where to get them.

What are land loans?

A land loan — also known as a “lot loan” — is a way to finance real estate that doesn’t have a house or other structure built on it. With these loans, you don’t have to commit to beginning construction on a house soon, the way you would with a home construction loan.

There are several categories of land, and the type you’re considering will impact the type of loan you can get:

• Raw land. Also called “undeveloped” land, this is land with no improvements (such as water and sewer lines or road access) that would help make the property buildable.
• Unimproved land. While similar to raw land, unimproved land may have some basic infrastructure or older structures, but generally doesn’t have all of the water, electric and other utilities you’ll need. This land may have once had a house on it, but doesn’t any longer.
• Improved land. This type of land has been developed in some way, and usually has access to utilities and roads. If it’s ready for building a house, it may also be known as a “lot.”

How do land loans work?

Like a traditional mortgage, land loans are secured by the property they purchase. This means that if you can’t make your mortgage loan payments, you could lose the land to foreclosure.

Land loans require you to make a down payment and you’ll repay the loan over time. However, unlike traditional mortgages, land loans typically have short repayment periods, ranging from two to five years. Because of this, they often come with a large balloon payment at the end.

Land loans can come from banks or credit unions, specialty lenders or government programs. However, they may be harder to find than a traditional mortgage because not every mortgage lender offers them.

How to qualify for a land loan

You’ll typically need a higher down payment and credit score to qualify for a land loan, compared to traditional mortgage requirements. Usually, the more developed the property, the lower the down payment you’ll need.

Down payment minimum: 15% to 35%The Federal Deposit Insurance Corporation (FDIC) sets minimum down payment requirements for land loans, though individual lenders may decide to set more stringent standards. The minimum down payments required by FDIC standards are:

→ Raw land: 35%
→ Unimproved land: 25%
→ Improved land: 15%

Debt-to-income (DTI) ratio: 43% maximumThe maximum DTI ratio is another qualification factor that varies lender to lender but, in most cases, you won’t be a good candidate for a loan unless your DTI is 43% or lower.

Credit score minimum: 700The FDIC doesn’t have a hard minimum when it comes to the credit score needed to qualify for a land loan. However, it’s common for lenders to require at least a 700 score. In some cases you may squeak in with a score in the high 600s or, on the other hand, you may be required to increase your score to the lower 700s — it’s ultimately up to your lender.

How to finance land

1. Conventional land loan

While not every lender offers land loans, you’ll be able to find many banks and credit unions that do offer them. You may have the best luck with local lenders who understand the value of the land in your area. There are also specialty lenders, like farm credit organizations, that offer land loans.

 See current mortgage rates.

2. FHA land loan

The Federal Housing Administration (FHA) has loan programs to help finance the purchase of land. However, you can’t purchase land you intend to leave vacant — you’ll have to commit to building a home on the property or find land with a house already on it — and you’ll have to live in it as your primary residence.

The FHA construction loan program is open to people with a credit score as low as 500 and a 10% down payment. You’ll close once, and the FHA construction loan will convert to a traditional FHA mortgage when the project is complete.

 See current FHA mortgage rates.

3. VA land loan

VA loans are for eligible military service members and veterans and are guaranteed by the U.S. Department of Veterans Affairs (VA). You have two main options for financing land:

• The VA construction loan program lets you use a VA loan to buy land, but only if you’re going to later build a house on it. The land will need to be improved, meaning it can be accessed via paved roads and can be hooked up to basic utilities. The program is only open to people who want to fund a new build with a VA loan and will also use a VA loan to finance their new home after construction is complete.
• The VA farm loan program is for borrowers who want to purchase farm land that already has a home built on it.

 See current VA mortgage rates.

4. Home equity loan

If you own a home with a significant amount of equity, you may be able to take out a home equity loan and use the proceeds to buy land. Equity is the portion of your home that you own outright. You can calculate how much equity you have by subtracting what you owe on your mortgage from your home’s value.

With a home equity loan, you’ll receive a lump sum up front and pay it back over time, usually at a fixed rate. You’re not limited in what you can use the money for. So, if you have enough equity, you may qualify for a large enough loan to buy a parcel of land.

If the equity in your home isn’t enough to buy land outright, you may be able to use your home equity loan to make a down payment on a land loan.

 See current home equity loan rates.

5. Home equity line of credit (HELOC)

Home equity lines of credit (HELOCs) are another type of loan that leverages the equity you have in your home. Instead of getting a lump sum, you have a credit line that you can draw from over time — up to a set limit. At the end of your draw period, you’ll lose access to the HELOC funds and start paying back the amount you borrowed, with interest that usually accrues at a variable interest rate.

 See current HELOC rates.

6. USDA loan

USDA loan programs, backed by the U.S. Department of Agriculture, offer financing for buying land if the borrower is planning to build a home. Only low- to moderate-income families are eligible, and the land must be in a qualified rural area. Unlike traditional USDA mortgages, these loans are only available with five-year terms. The USDA also offers single-close construction loans that will finance the land purchase and construction, then convert to a long-term mortgage.

7. SBA loan

If you’re looking to buy land for a business property, you may be able to use a small business loan. Loans backed by the U.S. Small Business Administration (SBA) allow borrowers to finance raw land and the costs of constructing a commercial building. With an SBA 504 loan, you would need to make a 10% down payment. A bank or credit union will finance half of the project and a certified development corporation (CDC) contributes the remaining 40%, which is guaranteed by the SBA. Loan terms of 10, 20 or 25 years are available.

8. Seller financing

Seller financing, also known as owner financing, is when you get a loan from the seller of the property instead of a traditional lender. You can also use seller financing for part of the purchase price, rather than all of it. This can be a good option when a traditional loan isn’t available.

Pros and cons of land loans