If building a house is on your mind, then getting a land loan is as well.
A land loan is one of the ways that you can make your dream possible.
In this blog, we’ll tell you everything you need to know about land loans and how to apply for them.
Let’s get started.
1. What is a land loan?
A land loan is a loan used to finance the purchase of a plot of land and sometimes the construction of a structure on the land (either residential or commercial) as well.
The type of land loan you obtain will ultimately depend on the location of the land and the intended use.
It can be fairly easy or relatively difficult for you to obtain a land loan depending on your financial capabilities.
2. How do land loans work?
Different types of land loans all have their own qualifications for borrowers to meet.
We’ll walk you through the commonalities that you’ll need to know.
Depending on which type you’re interested in, you’ll need to read up on how to apply more closely.
Prove your credit score. Land loans require an excellent credit score, so be sure to keep your score up by paying down debt and making credit card payments on time.
Make a plan. When you apply for a land loan, you need to explain your intended use of the land.
This will vary depending on the loan you’re applying for.
In this plan, you’ll need to highlight aspects of the property like zoning, land-use restrictions, surveyed boundaries, and access to utilities.
Show your lender that you’ve done your homework and that you’re not a risky candidate.
Allow your lender to review your application.
After considering everything, your lender can issue the appropriate rates and obligations of your land loan.
Keep in mind that land loan rates are often higher than mortgage rates because they’re riskier.
If you have a better credit score or a better debt-to-income ratio, then you’ll qualify for lower rates.
Make your down payment and get started.
Once all the terms are settled, you’ll be expected to make a down payment and pay the loan back according to the decided interest rate.
3. What are the pros and cons of land loans?
Land loans have some benefits and some drawbacks.
If you’re on the fence about whether this is the best route for you, let’s talk about why you may or may not go this route.
Pros
The main advantage that a land loan offers to the borrower is the ability to purchase land.
This could be in order to buy farm or ranchland.
Or it may be to build a home or business with all of its customizations.
With a land loan, you’re able to utilize an up-and-coming area for either residential or commercial purposes.
Cons
Overall, a land loan (despite its appeal to those looking to build a custom home or business) can be risky.
There is no collateral, which makes you more likely to be turned down by a lender.
The lender can also levy an incredibly high down payment, which you may not be able to make.
Or they could choose to set a high interest rate.
4. How do I find a land loan?
Are you looking to get a land loan of your own?
Often, it’s easiest to do this from a specialized bank (such as one that focuses on farming loans), community bank or credit union located near the land you’re looking to buy and build on.
You may also want to contact a mortgage broker, who should know which banks are willing to issue land loans.
It’s worth noting before you start this process that land loans are more difficult to get than mortgages, so you’ll want to be prepared for this process.
Cast a wider net if necessary and don’t get discouraged.
The type of lender you’ll need depends on what you plan to build on the land and what type of investment you make.
If you’ll working with a builder, they can often let you know where to look as well.
5. What types of land loans exist?
There are three common types of land loans: raw, unimproved, and improved.
We’ll discuss each of the following to help you understand a bit about each and what you may require.
Raw land loan
Raw land is entirely undeveloped land.
It doesn’t have electricity, sewers, or roads.
It can be difficult to get financing for raw land, so if this is your intention, then you’ll need to create a detailed plan about your goals.
Reflect on how you plan to develop the land prior to applying.
This demonstrates your commitment to lenders and will assure them that you’re not a significant risk.
Approaching a raw land loan with a large down payment and good credit can also be a way to show your qualifications.
Although raw land is cheaper than developed land, you must be prepared for the higher interest rates and down payments that this type of loan often requires.
Unimproved land loan
Unimproved land is a step above raw land, but a step below developed land.
It may have some utilities and amenities, but will still lack an electric meter, phone box, and natural gas meter.
An unimproved land loan isn’t as risky as a raw land loan, but keep in mind that it can still be difficult to obtain.
You’ll want to have that same detailed plan, a large down payment, and a strong credit score.
This can only help you.
That said, you are looking at lower down payments and interest rates than the raw land loan.
Improved land loan
With an improved land loan, you’ll still have access to things like roads, electricity, and water.
This is the most developed type of land of the three loans, which may make it more expensive to purchase.
With that, the interest rates and down payments will be lower.
The best course of action for anyone pursuing an improved land loan is to have a good credit score and put down a large chunk as a down payment.
It’s also worth noting that land loans often mean higher down payments and interest rates than a typical home loan acquired through a mortgage because there isn’t a dollar amount assigned to the property.
As land loans are riskier transactions for lenders, down payments are their way of creating collateral.
6. Is improved land better than raw land?
Improved land is land that has access to roads, electricity, and water.
Unimproved land (sometimes called raw land) doesn’t have access to these services.
Sometimes you can install septic tanks or connect the land to public utilities.
However, if you know you want to do this, then you’ll want to check well before you purchase the land.
This can be a long and arduous process.
The last thing you want to find out is that this is impossible after you’ve already spent a good chunk of change.
Is one better than the other?
It depends on your perspective and your purpose.
Unimproved land can require a substantially higher down payment and construction will also take longer.
So, if you’re not looking to invest significant money or time into this project, improved land is often the way to go.
7. When are lenders most likely to grant you a loan?
Lenders are most willing to lend money when you plan to build on your property because this adds value.
Holding raw land is considered speculative, and even if building a structure is risky, you’re more likely to come out successful in the end.
Still, it is possible to get a land loan if you are not planning to build on the property, but you should expect to pay a very high down payment (around 50%).
For this reason, the most common type of land loan is a construction loan.
8. What is a construction loan?
You may hear the term construction loan used in the conversation about land loans.
Construction loans refer to a single loan used to buy land and fund construction.
There are two types of construction loans:
Construction-to-permanent:
As the name suggests, this is a loan that converts to a permanent mortgage once you have constructed your building.
Often, you make interest-only payments during construction and then convert to princial-plus-interest payments once it converts to the permanent loan.
You’ll do less paperwork and have fewer closing costs, which is often a win for the buyer.
Construction only:
This is a short term loan that will cover the construction period only.
At the end of construction, you will need to get a separate, permanent mortgage in order to pay off the construction loan.
You will have to pay twice for closing costs and go through the approval process twice.
Regardless of the type of construction loan, there are a few things to keep in mind:
You will likely need to make at least a 20% down payment and have a high credit score.
The lender will want to review your building plans and budget.
Construction loans are rarely issued as a single, upfront payment.
You will likely have the loan dispersed in segments throughout the construction period based on a drawdown schedule.
So, as you hit key benchmarks, such as completing the foundation, you will be advanced a certain percentage of the loan.
The lender won’t just be evaluating your financial capacity, they will also be assessing your builder.
Thus, you will want to make sure that your builder has a great track record in order to inspire confidence.
9. How should I choose a land site for my land loan?
When you choose a land site prior to applying for a land loan, it’s worth noting that certain features will make your plot more attractive to lenders.
So, if you want to make it easier on yourself, you can consider looking for a lot that includes these components.
Boundaries:
Knowing where your boundaries lie is an important part of land loan approval.
Don’t fret if a lot doesn’t have incredibly clear boundaries.
You can always invest in a land survey, so you know exactly where your boundaries lie.
Utilities:
What utilities does your land already have in place?
Paved roads? Water? Gas? Electricity?
While you can install these, it can often be a long and difficult process.
You’ll need a plan and cost analysis in place if you plan to go this route.
Otherwise, knowing you already have access is a safer route.
Zoning and restrictions:
Have you checked the zoning on your land?
Do you know you can do what you want on it?
Is your land already part of an HOA or bound by covenants?
The lender will want to know about these restrictions in advance.
Future changes:
What future changes are occurring on or around your land that could potentially impact it?
Will new highways, schools, shopping centers, or other improvements be built?
Anything that can impact the value of your land should be noted in your plans.
10. Does alternative financing exist?
Yes! You can absolutely purchase land without taking out a land loan.
Because land loans can be difficult to get, it is wise to look at other options.
There may be something more suitable for your needs.
Here’s alternative financing you may consider.
Home equity loan:
Home equity loans don’t require a down payment.
Typically, you can also lock down a lower interest rate regardless of what you plan to do with the land because your home is what is securing the loan.
The interest you pay is not tax-deductible because you’re not using the loan to buy, build, or improve the home that you used as collateral.
Your repayment term will ultimately depend on the lender you use, but it could be as long as 5 to 30 years.
Beware of this loan if this is a risky financial situation for you because defaulting on the loan could ultimately mean losing your home.
Seller financing:
For those with poor credit, seller financing is an increasingly desirable option for some buyers.
This type of agreement allows buyers and sellers to make an agreement directly with a lender as an intermediary.
This is convenient for those who may struggle with their credit score (which must be good in the case of a land loan).
It often results in more flexible agreements than a financial institution would offer.
FHA Construction Loans:
FHA construction loans are construction-to-permanent loans that are backed by the federal government.
You will need to meet strict requirements in order to qualify, but, if you do, you won’t have to make the high down payment required by other construction lenders.
Even better, FHA construction loans also cover the cost of the land!
USDA Guaranteed Loans:
Like FHA loans, USDA construction loans are construction-to-permanent loans backed by the federal government that can cover the cost of both the land purchase and construction.
To qualify, you will need to meet the USDA’s income and credit requirements, and the lot must be in a rural area.
However, like FHA loans, USDA loans come with more favorable loan terms than traditional construction loans.
11. What can I afford?
Are you looking for information about what you can afford when it comes to land loans?
Use this land loan calculator!
12. What should I consider when applying for a land loan?
Before buying a piece of land or building lot, you’ll need to do the following so you can make an educated decision.
Get the land surveyed
Have an appraisal done
Understand whether the land is considered “buildable”
Check the land use and zoning restrictions
Note the utilities on the property (is the lot serviced publicly by the city sewer or privately by a septic system?)
Check for water on the land (is municipal water available or will a private well need to be installed?)
Look into whether the property is in a special hazard flood zone or wetland.
Ensure there is access to public roads
Investigate easements to the land
Research property liens (recorded and unrecorded)
Do a title search and get title insurance to protect your investment
Final thoughts
The land loan process can be complicated, and you’ll want to investigate all of your options before you commit to a loan.
Understanding all of your options before proceeding will ensure that you apply for the right loan and demonstrate that you’re less of a risk to lenders.
Additional Resources
If you are looking to buy affordable land, you can check out our Listings page.
And before you buy land, make sure you check out Gokce Land Due Diligence Program. 
Don't forget to check out my latest Gokce Knowledge Class: 31 Lessons I Learned Selling My First 500 Properties Online. 
If you are looking to sell land, visit our page on how to Sell Your Land.
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Disclaimer: we are not lawyers, accountants or financial advisors and the information in this article is for informational purposes only. This article is based on our own research and experience and we do our best to keep it accurate and up-to-date, but it may contain errors. Please be sure to consult a legal or financial professional before making any investment decisions.
Prior to starting Gokce Capital, Erika received a Bachelor of Architecture from the University of Southern California and a graduate degree in Urban Policy from Columbia University. She worked as both an architectural designer and engineer in New York before joining the New York City Department of Housing Preservation and Development.
Erika currently lives in the New York Metropolitan area with her spouse, daughter and cat. She is originally from Chicago and still considers herself a midwesterner at heart.
Erika also loves to read, write and travel (fun fact, she has visited all 50 states and more than 30 countries!). Her new book, Land Investing Mistakes: 11 True Stories You Need To Know Before Buying Land, is now available on Amazon.