Land Loans: What You Should Know

So you found the perfect piece of land to build your dream home but don’t have the funds to purchase it outright? A land loan can provide the financing you need to buy the property. However, lenders consider land loans risky because there’s no existing structure on the property to serve as collateral, making them harder to qualify for compared to traditional mortgages.

MoneyGeek explains what a land loan is, the different types available and how to get one to help you purchase a plot of land for building a home, farming or investing.

Land loans, also known as lot loans, finance the purchase of land. Because no existing structure serves as collateral, these loans often have higher interest rates and stricter terms, making them riskier for lenders and harder to qualify for.

Unlike construction loans, which finance both the building of a home and sometimes the land, land loans only cover the purchase of the land itself. Construction loans are typically short-term and may convert to a permanent mortgage after construction. In contrast, land loans provide financing only for the land, and borrowers need to secure separate funding if they plan to build on the property at a later time.

Land loans are often ideal for individuals who want to purchase land but aren’t ready to start building right away. These buyers may have found a desirable location they wish to secure for future use, whether for building a home, business or other development.

A land loan works similarly to a mortgage, where you apply with a lender, get approved and receive funds to purchase the plot of land. Then, you'll pay the lender back, with interest, over the following years.

Since land loans carry more risk due to the absence of a structure to serve as collateral, you'll need a larger down payment, usually between 20% and 50%, based on the type of land. You’ll also need a good credit score (670 to 739) and a debt-to-income ratio of 43% or less. Some lenders may ask for a detailed plan on how you intend to use the land, such as for development or leaving it vacant.

Land loan rates tend to be higher than traditional mortgage rates. The exact rate will depend on the type of land — whether it's developed or undeveloped — and your credit profile. A higher credit score and lower debt-to-income ratio can help you qualify for better rates, as they indicate lower risk to the lender.

Land loans come in different types, depending on the condition and development level of the land being purchased. The three main types of land loans are:

While land loans provide the opportunity to secure property before development, they also tend to have stricter terms and higher interest rates than traditional mortgages. Understanding the pros and cons of land loans can help you determine if this type of financing is the right fit for your goals.

When purchasing land, a land loan isn’t the only option. There are several alternatives that may offer more flexibility or better terms, depending on your financial situation and plans for the property.

We answered a list of frequently asked questions about land loans to help you make an informed decision about purchasing land.