Considering a land loan?

Location, location, location… the golden rule of real estate starts with the land.

Whether you’re buying land to build your dream home, buying a getaway property for recreation, or just buying the empty lot next to your current residence for better privacy, the process of getting a loan to buy land is more involved than getting a mortgage to buy an existing home. But when you understand how a land loan works and when you choose to work with an experienced lender, the process gets easier.

What is a land loan?

Sometimes called a lot loan, a land loan works like a mortgage, but the money is used to buy vacant property. Land loans are riskier for lenders since there is no home to serve as collateral. Because of this, not all mortgage loan companies offer land loans, the loans often have higher required down payments and interest rates, and the term is usually shorter—up to 15 instead of 30 years. On the plus side, though, a land loan has no private mortgage insurance (PMI) requirement.

How to get a land loan

When applying for a land loan, set yourself up for success by going through many of the same steps you take when applying for a regular mortgage. First make sure you have excellent credit. Next, choose a lender who offers land loans; not all do. Then do your homework to make sure the property meets your goals (see Buying Property 101 below). Organize your finances before you apply to make sure your debt-to-income ratio is attractive to the lender.

It’s helpful to get preapproved so you know what you can afford and how much down payment you’ll need. For example, Global has a maximum loan-to-value (LTV) ratio of 75% for a residential lot (property intended as the future site of your personal residence), which means you’ll need to make a down payment of at least 25% of the purchase price. The maximum LTV for a recreational lot (a getaway spot intended for your personal use) is 70%.

Your lender will typically require information on zoning and boundary surveys; they may also want details on how you plan to develop the land. Once your loan application is approved, the process of receiving and paying back the money over time works much like that of a typical mortgage.

Current land loan interest rates

The interest rate and terms for your land loan will depend on many factors, including your credit and other qualifications. Learn more about Global rates and other land loan lending requirements.

Types of land loans

The type of land loan you get depends on access and other issues.

Raw land loan

This is undeveloped land, with no easy access to utilities or electricity. Raw land also does not have road access and may be only accessible by air. This type of loan usually has a higher interest rate; not all lenders offer loans for raw land.

Unimproved land loan

Slightly more developed, this type of land has access to basic infrastructure such as roads and utilities, but utilities are not installed (i.e., there’s no electrical or gas meter onsite). For example, land eligible for a Recreational Lot loan from Global must be accessible by road from a major population center, or accessible by water from a public launch site using small watercraft on a navigable waterway. 

Improved land loan

Because this land is ready for building, with easy access to utilities and roads, it is easier to finance than other types of land, and interest rates are usually lower than the two types of loans described above. For example, land eligible for a Global Residential Lot loan must have reasonable access to water, sewer, and electric services, and must be accessible on a maintained road.

Other types of land loans

• USDA loan: These loans from the U.S. Department of Agriculture provide funding for low- to moderate-income people who want to purchase land in qualifying rural areas. The type of loan depends on whether you will build the home yourself or hire a contractor, but the loans are only available with a two-year term.
• SBA loan: The U.S. Small Business Administration offers these loans to business owners wanting to purchase land for commercial purposes. Money is provided through a partnership between a qualifying lender and the SBA.
• C2P (Construction to Permanent) loan: This loan covers both the purchase of the land and the cost of building the home in one transaction. You need firm building plans, a schedule and a signed construction contract for this loan option.

Don’t confuse land loans with construction or home loans

Buying property 101

When buying land, you must take time to check things which typically don’t need verification when buying an existing home.

Check access to utilities

Contact local utility providers to determine whether the land you’re considering has ready access to things like electricity, sewer, internet, and water. If the land is not served by a public sewer system, you’ll need to check the viability for installing a septic system, which has its own unique requirements. For example, in many parts of the country, lenders need a perc (percolation) test to ensure that a septic system can be installed on the property. And if you don’t have access to water, you’ll need to check to see if building a well is an option.

Make sure the land is zoned for your project

If this is the site of your future dream house, check with the local or county planning or building department to make sure the property zoning allows residential use. Learn about any other restrictions or covenants that might limit your use of the land, such as wetlands or shoreline restrictions or other critical areas limitations. Finally, be sure to ask about what may happen in the area in the future, such as other developments or road construction that may change the value of the property.

Check buildability

Chat with a contractor if you have questions about slope, drainage, or other building limitations of the land. If your property is subject to rules of a homeowners’ association (HOA), make sure that you can build the style of home you want. For example, some HOAs limit building height, and others prohibit storage of RVs or boats on the property.

Have the property surveyed

Once you know that the property is buildable, pay to have a land survey done. The survey shows you the exact boundaries of the property you are about to purchase. Most lenders require a survey before they’ll approve a land loan; be sure to know their requirements in terms of the type of survey done.

Alternatives to land loans

Other options are available for people wanting to purchase land.

• Home equity loans: You can borrow against the equity of your primary residence and use the funds to purchase land. There’s no required down payment, and the loan often has a lower interest rate than a standard land loan. However, be aware that a default on the home equity loan could cause you to lose your home altogether.
• Seller financing: The land seller may function as a lender, structuring a contract that has you paying them over time instead of a traditional credit union or bank. While this option offers convenience and flexibility, it may also mean that the seller retains legal ownership of the land until you have paid the loan in full. If you are considering seller financing as an option, it’s recommended that you have a qualified attorney review all contract language.

Your dream home starts with a dream location

While land loans are more complicated than a traditional mortgage, they are possible, especially if you’ve done your homework. It pays to work with a reliable lender who not only understands the requirements but will support you through the process… getting you closer to that home sweet home goal.