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.

Key Takeaways

A land loan is financing used to purchase a plot of land for future development, investment or other purposes.

The main types of land loans are raw land loans, unimproved land loans and improved land loans, each with different levels of development and risk.

Eligibility for a land loan typically includes a strong credit score, a larger down payment and a clear plan for the land's use.

What Is a Land Loan?

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.

How Does a Land Loan Work?

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.

Types of Land Loans

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:

Raw land loans

Raw land refers to completely undeveloped land with no utilities, roads or structures. These loans are the riskiest for lenders since raw land requires significant development. Because of this, raw land loans usually have stricter requirements, including larger down payments and higher interest rates.

Unimproved land loans

Unimproved land is slightly more developed than raw land but still lacks major utilities like water, electricity and sewer lines. Roads may be accessible, but additional work is needed to prepare the land for construction. Lenders view unimproved land loans as risky but slightly less so than raw land, so they typically come with more flexible terms.

Improved land loans

Improved land is the most developed type of land, with access to essential utilities like water, electricity and sewer lines and established roads. Because it is ready for immediate development, improved land tends to be more expensive to purchase. However, lenders see it as less risky, so improved land loans are often easier to get than loans for raw or unimproved land.

Pros and Cons of Land Loans

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.

Pros of Land Loans


Flexibility in property use	Land loans give you the freedom to purchase land for various purposes, such as building a home, farming or holding it as an investment. This flexibility allows you to plan and develop the property exactly the way you want it.
Can be convertible	A land loan can be refinanced into a construction loan, allowing you to finance building costs on the same property. This flexibility can simplify the financing process, making it easier to transition from purchasing land to constructing a home or other structures.
Gives you time	A land loan allows you to secure the property without rushing into construction. This allows you to develop your plans or wait for better financial or market conditions before starting to build.

Cons of Land Loans


Higher interest rates	Land loans generally have higher interest rates than traditional mortgages because lenders view them as riskier. Since there is no structure on the property to serve as collateral, lenders charge more to compensate for the increased risk.
Larger down payments	Lenders often require larger down payments for land loans, typically up to 50% of the land’s value. This makes it more expensive upfront, especially for borrowers with limited savings.
Harder to get	Not many lenders offer land loans, making it more difficult to find financing options. Those that do often have stricter credit and income conditions, usually requiring a higher credit score and a clear plan for the land’s development.

How to Get a Loan for a Land

Whether you’re purchasing land for future development or investment, it’s essential to approach the process with a clear plan and the right financial profile. Here’s a breakdown of the steps involved in getting a land loan.

1
Develop a plan
Before seeking a land loan, have a clear plan for how you intend to use the property. Lenders often want to know if you plan to build on the land, hold it for investment or use it for other purposes. A solid plan can improve your chances of approval and may lead to better loan terms.
2
Check your credit score
Your credit score plays a significant role in qualifying for a land loan. Most lenders require a credit score of 680 or higher. Check your credit score in advance to ensure it meets lender requirements, and consider improving it if needed to secure better rates and terms.
3
Find the land or lot you want to purchase
Once you have a plan and know your credit score, search for the land you want to buy. Consider factors such as location, zoning laws and whether the land is raw, unimproved or improved, as these will impact your loan options and terms.
4
Shop around for lenders
Not all lenders offer land loans, so compare options from banks, credit unions and specialty lenders. Look for lenders offering competitive rates and terms, and ensure they are familiar with land loan processes. Gather quotes to find the best deal.
5
Apply for a land loan
After selecting a lender, submit your loan application. You may need to provide financial documentation, land details and a development plan. The lender will review your credit, income and land plans before deciding on your loan.

Alternatives to Land Loans

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.

Home equity loans and lines of credit

If you already own a home with significant equity, you can tap into that equity to finance the purchase of land. A home equity loan provides a lump sum, while a home equity line of credit (HELOC) gives you access to a revolving line of credit. These options typically have lower interest rates than land loans since your home serves as collateral. However, this also means you risk losing your home if you default on payments.

Seller financing

In some cases, the seller of the land may be willing to finance the purchase themselves. With seller financing, you make payments directly to the seller rather than through a bank or lender. This option may offer more flexible terms and lower qualification requirements, but interest rates can be higher. Additionally, both parties must agree to the terms, and finding sellers willing to finance may be more difficult.

Government-backed construction loans

These loans, such as those backed by the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA), allow you to finance both the purchase of land and the construction of a home. These loans typically come with lower interest rates and more favorable terms than traditional land loans. However, they are often limited to buyers planning to build a home on the land immediately. You must also meet specific eligibility requirements to qualify for these government-backed loans.

FAQ: Land Loans

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

Can you finance land?

You can finance land through a land loan or several other financing options. Land loans are designed specifically for purchasing land, whether it's raw, unimproved or improved. Other options include home equity loans, lines of credit, seller financing and government-backed construction loans.

Where to get a land loan?

You can get a land loan from various lenders, including banks, credit unions and specialized land lenders. Traditional banks and credit unions may offer land loans, but not all do, so you should shop around to find lenders specifically offering these types of loans. Specialized lenders focusing on agricultural or rural land purchases can also be a good option, particularly if the land is less developed.

How hard is it to get a land loan?

Getting a land loan can be more difficult than obtaining a traditional mortgage. Lenders consider land loans riskier because there's no existing structure to serve as collateral, which can lead to stricter qualification requirements. You'll typically need a strong credit score, a larger down payment and a clear plan for using the land.

What types of land can you buy with a land loan?

You can buy different types of land with a land loan, including raw, unimproved and improved land. Raw land is completely undeveloped and may not have access to utilities or infrastructure. Unimproved land is slightly more developed, with some access to utilities but still requiring significant work. Improved land is fully developed with essential services like water, electricity and sewer lines.

How much down payment do you need for a land loan?

Land loans typically require a larger down payment than traditional home loans. The down payment for a land loan usually ranges from 20% to 50% of the land's purchase price, depending on factors like the type of land and the lender's policies.

What are the interest rates for land loans?

Land loan interest rates are generally higher than traditional mortgages because lenders consider land purchases riskier. The exact rate you'll pay depends on factors such as the land type, your credit score and the lender's policies.

How long are land loan terms?

Land loan terms vary depending on the lender and the type of loan. Some land loans may have shorter terms, ranging from five to 15 years, while others could be longer, up to 30 years, similar to traditional mortgages. However, shorter loan terms usually come with higher monthly payments.

About Zachary Romeo, CBCA

Zachary Romeo is a certified Commercial Banking and Credit Analyst (CBCA), and the Head of Loans and Banking at MoneyGeek. Previously, he led production teams for some of the largest online informational resources in higher education, with over 13 years of experience in editorial production.

Romeo has a bachelor's degree in biological engineering from Cornell University. He geeks out on minimizing personal debt and helping others do the same through people-first content.

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