Where to Get Land Loans and What to Expect

Land loans provide a financing pathway for individuals and businesses seeking to acquire undeveloped or partially developed land. Unlike traditional mortgages that secure existing structures, land loans are specifically designed for vacant plots, whether for future construction, agricultural endeavors, recreational use, or investment. The process of securing a land loan often presents different considerations than financing a home, primarily due to the unique nature of land as collateral.

Types of Land Loans

Land loans are typically categorized based on the land’s current state of development and intended use. Each category carries distinct characteristics regarding risk for lenders, which in turn affects loan terms.

Raw land loans: Finance undeveloped plots that lack essential infrastructure such as utilities, roads, or existing structures. These loans are riskiest for lenders, often resulting in higher down payments and interest rates due to their speculative nature.
Unimproved land loans: For plots that may have some basic infrastructure, like road access or limited utility availability, but still require significant development before construction. While less risky than raw land, securing financing for unimproved land can still be challenging.
Improved land loans: For parcels that come equipped with necessary infrastructure, including roads, water, and sewage systems, making them ready for immediate construction. These properties pose lower risk to lenders, leading to more favorable loan terms compared to raw or unimproved land.
Land for construction loans: Often combined with a construction loan, covering both the land purchase and the subsequent building costs, though they are distinct from loans solely for land acquisition.
Recreational land loans: Specifically for properties intended for leisure activities like hunting, fishing, or camping, typically requiring a down payment of 15% to 30%.

Sources of Land Loans

Understanding where to obtain a land loan is crucial, as different institutions specialize in various property types and borrower needs. Each source offers distinct advantages and focuses on specific land loan categories.

Traditional banks and credit unions: Offer land loans, but their approach varies. While some local and community banks may provide these loans, they often prefer developed land or plots ready for construction due to perceived lower risk. These institutions have more stringent underwriting standards, requiring higher credit scores and substantial down payments. Larger national banks may be more hesitant to finance raw land, viewing it as a riskier investment compared to properties with existing structures.
Specialized land lenders and rural banks: Focus on land and rural properties, possessing greater flexibility and expertise in this niche market. These lenders are accustomed to the unique challenges and characteristics of undeveloped land. They may offer tailored products and more flexible terms for raw or unimproved parcels than traditional banks.
The Farm Credit System (FCS): A nationwide network of borrower-owned lending institutions that provides credit to farmers, ranchers, and rural homeowners. FCS institutions specialize in financing agricultural land and rural properties, offering various loan products, including those for land purchases. They provide competitive rates and terms, understanding rural land use and agricultural operations.
Private lenders: Including hard money lenders, serve as an alternative for borrowers who may not qualify for traditional financing. These lenders are more willing to finance riskier land deals or those with unique circumstances, with faster approval processes. However, this flexibility comes with higher interest rates and shorter repayment terms compared to conventional loans.
Seller financing: An arrangement where the landowner acts as the lender, directly providing financing to the buyer. This option benefits buyers who face difficulties qualifying for traditional loans, as sellers may offer flexible terms, lower down payments, or lenient credit requirements. The terms of seller financing are negotiated directly between the buyer and seller, offering a customized solution.

Eligibility and Application Preparation

Before applying for a land loan, borrowers must prepare by gathering specific information and documentation. Lenders evaluate key factors to assess a borrower’s financial capacity and the viability of the land acquisition.

Financial Health: Lenders examine the borrower’s financial health, including credit score, debt-to-income (DTI) ratio, and income stability. A strong credit score, 670 or higher, is expected, and a lower DTI ratio, below 43%, is preferred to demonstrate repayment capacity. Applicants should prepare financial statements, federal tax returns for the past three years, and recent pay stubs or proof of income.
Down Payment: Land loans require higher down payments than traditional mortgages, with amounts ranging from 15% to 50% of the purchase price, depending on the land’s development status. Raw land demands the highest down payments, 35% or more, while improved land may require 15% to 25%. Borrowers should have proof of available funds for the down payment, including verified checking, savings, or investment accounts.
Land Information: Detailed information about the land is essential for the application. This includes recent surveys to establish boundaries, current appraisals to determine market value, and documentation of zoning regulations to confirm intended use. Lenders also require verification of access to utilities, such as water, sewer, and electricity, and environmental reports, especially for unimproved land.
Intended Use: Lenders inquire about the borrower’s intended purpose for the land, whether it is for building, farming, recreational use, or investment. Having a clear and detailed plan for the land’s use, including a business plan if for commercial purposes, strengthens the application. This demonstrates a well-thought-out strategy and reduces risk for the lender.

The Land Loan Application and Approval Process

Once preparatory documents and information are compiled, the land loan application and approval process follows a structured sequence. This ensures lenders conduct thorough due diligence before approving financing.

Application Submission: The initial step involves submitting the completed application along with prepared financial and land-related documents to the chosen lender. This submission can be done through online portals, in-person meetings, or mail, depending on the institution’s procedures. The application package includes personal identification, tax returns, balance sheets, and details about the proposed collateral.
Underwriting and Due Diligence: Following submission, the lender initiates underwriting and due diligence. The lender reviews submitted information, assesses the borrower’s creditworthiness, and evaluates the land’s characteristics. A land-specific appraisal determines the property’s market value, and a title search identifies any liens, easements, or other restrictions. Environmental assessments may also be required, particularly for unimproved or raw land, to identify risks.
Loan Offer and Terms: If the application meets the lender’s criteria, a loan offer is extended, outlining the specific terms. These terms include the interest rate, which is often higher than traditional mortgages due to the increased risk associated with land loans, and the loan-to-value (LTV) ratio, which reflects the required down payment. The repayment schedule and contingencies related to the land’s use or development are also detailed. Loan terms range from 5 to 20 years, with shorter terms common for riskier loans.
Closing: The final stage is closing, where all parties sign legal documents. This includes the loan agreement, promissory note, and deed of trust or mortgage. Funds are disbursed, and the title to the land is transferred to the borrower. Closing costs, which may include survey fees, environmental assessment costs, and title insurance, are typically paid at this time. The entire process from application to closing takes approximately 30 to 60 days, though this timeline varies based on the complexity of the land and the responsiveness of involved parties.