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How Do You Get a Land Loan?: Rates and Procedure, Explained

A land loan is financing that allows you to purchase a plot of land. As with a home mortgage, you can obtain a land loan through a bank or a lender, who will evaluate your credit history and the value of the land to determine if you’re an eligible buyer.

But unlike a home mortgage—with a dollar amount assigned to the property—it can be more complicated to figure out what land is worth because there is no property collateral. That makes land loans a riskier transaction for a lender. Therefore, down payments and interest rates will be higher than for a typical home loan.

How Do You Get a Land Loan?

There are different types of land loans, and each option has its own set of qualifications to meet before you can secure financing. In general, you will need to prove that you have excellent credit, an acceptable debt-to-income ratio and consistent income. The process is very similar to that of a traditional home mortgage.

Compared to constructed property, land tends to be a riskier investment that'll require you to pay more in your down payment and interest rates. Land loans are often short-term loans: while you might be familiar with the typical 15- and 30-year terms offered on a home mortgage, land loan terms are often two to five years with a balloon payment after that time. There are longer term loans available for special cases—particularly if you’re going to use the land to build a home.

Different Types of Land Loans

The process for getting a land loan varies depending on where you’re buying land and what you plan to use it for. Here are the common options for land loans:

Raw Land Loan

Raw land is property that has zero improvements on it, including electricity, sewers or roads. If you’re purchasing totally undeveloped land, then you'd need to apply for a raw land loan. Obtaining financing for unimproved land can be especially difficult: the longer time it takes to develop that land represents a greater risk to the lender. You can increase your chances of securing a raw land loan if you have a solid plan for developing the land, as well as a substantial down payment and excellent credit. Nevertheless, higher interest rates and significant down payments—sometimes up to 50%—are typical with these loans.

Lot Land Loan

Unlike raw land, lot land has some type of infrastructure already in place, such as lines for electricity and water. Lot land is usually building space for residential construction in developed areas. Lenders are more comfortable offering loans for lot property than they are for raw land, so upfront costs are generally lower. You'll still need a 10% to 20% down payment, and terms can stretch up to 20 years.

Construction Loans

Construction loans allow you to purchase land and cover the cost of construction in one loan. In order to apply for a construction loan, you’ll need to qualify with a credit score of about 700 or higher, a low debt-to-income ratio, consistent income, and an appraised value for the home plans. You can also expect to put 10% to 20% down on the loan. But there’s another step you’ll need to get through—presenting your construction plans. Your lender will want to see that a qualified builder is doing the construction, along with a timeline and projected costs.

If you want to expedite the process, make sure your plans are thorough. You can work with a builder that the lender recommends or is familiar with. The lender is involved throughout the building process because money is distributed over time. Each distribution is called a “draw,” and multiple draws are spaced out during the project. The draw schedule is worked out between the bank, the buyer and the builder; the bank might require an inspection before the first draw.

Construction loans are short term arrangements that usually last about a year. You'll make interest-only payments until the house is completed, and then convert to a standard 15- or 30-year mortgage.

Land Loan Interest Rates

Lenders view land loans as risky, so interest rates tend to be higher than mortgage interest rates. The better your credit score and more favorable your debt-to-income ratio, the more likely it is that you qualify for lower rates. Here are average current rates for a 10-year loan:

  • Lot Land Loan: 4% - 5%
  • Raw/Recreational Land Loan: 4.25% - 5.25%
  • Construction Loan Rate: 5.25% variable

Land Loan Rates by Property Type and Loan Term

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%

How to Choose Your Land Site

Certain factors will make your plot of land more attractive to lenders. For instance, land that appears easier and less costly to develop will likely help you secure more affordable financing than land that seems logistically or legally complicated to build on. Here are some considerations to help your approval process move more quickly:

Boundaries: Survey the land to make sure you know where the boundaries lie. Presenting accurate acreage will make it easier to prove the value of the land. The majority of lenders will require a boundary survey before they'll approve a land loan.

Utilities: If you’re buying a lot land, it'll likely have utilities in place. These will include paved roads, water, gas lines and electricity. If it’s missing something critical, or if the land is raw, you may have to present plans and a cost analysis for including those amenities.

Zoning and Restrictions: If your land is part of a homeowners association or bound by covenants, the lender will want to know.

Future Changes: Are there construction plans near your land, like new highways, schools, shopping centers or other improvements? That can affect the value of your land, so include it in your plans.

Purchasing land can be more involved and complicated than purchasing a property, so being prepared will simplify your loan approval process. The more detailed you are in the proposal you submit to a lender, the quicker you can secure your land and start building.

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