A simple guide to understanding land loans

Land loans

Homeownership is one way to own property, but have you ever considered owning land? It sounds intimidating, but once you understand what type of land you would like and the different options, it could be easier to understand and less intimidating. 

What is a land loan? 

A land loan is necessary if you want to purchase land, even if you plan to build a home on the land. Loans for land can be a little more complex than a mortgage because there are more elements to consider, such as zoning and what you have access to. 

Land loans work a little differently than standard loans, so it is essential to know your needs and requirements when inquiring about a land loan. 

How do land loans work?

As stated before, land loans are used to purchase land. This is a lot different because, in most cases, there is no collateral involved. After all, there is nothing there yet. The way a loan works varies on the intended use and, if at all, how soon you plan on building on the land. 

Like standard loans, you have to qualify for a loan based on credit score and down payment requirements. Once approved for a land loan, which tends to have a higher rate than a mortgage, you can begin paying on the loan and using your land as discussed with your lender. 

Types of land loans available

Depending on your use of the land, there are different loans you need to request. Let’s look at the three land loans you might need to consider depending on the land and how you plan to use it.

Raw land loan

A raw land loan tends to be for land that has limited access. This means it tends to have no or limited access to utilities or even a road. Having access to utilities and a street are huge positive factors for land. As a result, these loans tend to be less expensive. 

If you have time and funds to further develop the land to make it livable, this is a loan for you. The land will be less expensive, but the lender will likely have higher expectations.  

Unimproved land loan

An unimproved land loan is a step up from the raw land loan. For example, this land might have access to some utilities and require more minor improvements than a raw land loan. This is the middle ground as far as costs associated with land loans. 

It’ll be a little more expensive than a raw land loan but also a little easier to get because there is some collateral found on the land instead of the raw land loan. Someone might consider an unimproved land loan if they eventually plan to build a house on the land. 

Improved land loan

Improved land loans are for land that is ready to build on. These lands have access to roads and major utilities such as water and electricity. These are also referred to as lot land loans. They tend to be more common and are best for someone ready to build on the land once the loan is secured. 

Borrower requirements 

Land loans, like all loans, have varying requirements. Here are a few general requirements you can expect for all three land loans:  

  • Excellent credit score 
  • Low debt-to-income ratio 
  • Large deposit 
  • Stable income 
  • Provide a detailed plan on how you will use the land 

Land loan interest rates

Though land loan rates tend to be higher than a home loan interest rate, there are ways to qualify for a better rate. If you bring an excellent credit score and a lower debt to income ratio, you might find that the rates are not that bad. 

Land Type10-year fixed15-year fixed20-year fixed30-year fixed
Lot Land4%-5%4.30%-5.30%4.60%-5.60%4.65%-5.65%
Raw/Recreational Land4.25%-5.25%4.55%-5.55%4.85%-5.85%4.90%-5.90%

Advantages of land loans

  • Access to land that you can use to build your dream home 
  • Opportunity to gain access to less populated areas 
  • Freedom to see the project from start to finish 

Disadvantages of land loans

  • It may require a higher down payment 
  • Might be considered riskier because of the lack of collateral 
  • Might have construction complications due to the land being unused 

Land loan vs construction loan

A land loan and a construction loan are sometimes used interchangeably, but that is not the case. A land loan, as discussed, is a loan used to purchase either raw land, unimproved land, or improved land. A construction loan is used for construction on the land you bought. 

This loan could be used to build your home on business on your newly purchased land. Construction loans have similarities to land loans. They typically require a higher credit score and low debt to income ratio due to risks associated with the project. 

You will need a down payment, sometimes even 20%. A construction loan is different in that the loan terms are typically the duration of the project. Once the project is completed, that loan will have terms much like a mortgage. 

How to finance land

Now that you understand how land loans work, you might be wondering how to finance land. Let’s explore your options. 

Seller financing

Seller financing, much like the name, is when the seller helps cover the purchase of the property they’re selling with the buyer. In this case, the buyer is likely making payments directly to the seller to purchase the land. 

This option might be considered if the buyer does not have excellent credit or money for a down payment. It is important to note that the seller typically takes all the risk because the loan is in their name. If payments have defaulted, they will be obligated to them. 

Local banks and credit unions

It is common for your local bank and/or credit union to provide financing options for the land. Your bank might offer different options depending on how improved the land is. 

The more developed the land, the more likely you will have a lower down payment requirement. This might be ideal if you are looking to purchase unimproved land or improved land instead of raw land. 

USDA loan

U.S Department of Agriculture (USDA) loans are offered for low-to-moderate-income families. If you qualify for a USDA loan, it would need to be used for land to build a home. 

That means that raw land would likely not be approved for this type of loan. In addition, these loans typically only have two-year terms. This is important to consider when applying for a USDA loan. 

Home equity loans

Home equity loans require you to use your home as equity. This can be beneficial, but consider that defaulting on the loan could mean losing your home. 

Home equity loans tend to have lower interest rates and do not require a down payment which is ideal for someone who does hot have the cash upfront. When you qualify for the loan, you receive the money upfront and then make monthly payments towards what you borrow. This is an option if you have an existing property to borrow against. 

Land loans can be simple 

It can be pretty simple to purchase land that piques your interest. If it is raw, unimproved, or improved, there is a way to finance it. It is essential to have a plan for how you want to use the land and know where your credit stands to ensure you qualify for the best rate. Land loans can be relatively simple if you keep those things in mind. If it is land to build your dream home or create a farm, you have lots of options to finance and make your dreams come true.


What is the interest rate on land loans?

Interest rates vary but can range from 4% to 6% depending on whether or not the land is raw or not as well as the terms of the loan.

Is it difficult to get a land loan?

Land loans do require a high credit score and can require a large down payment. This can make it difficult for some to obtain.

Is owning land a good investment?

Owning land can be a good investment. You can invest in raw land and plan for development in an up and coming area that will later yield a higher property value in the future.

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