What is a land loan?
A land loan is a loan used to buy a plot of land. Land loans can be used to buy land for residential homes for business purposes. The type of land loan you apply for will depend on where the land is and how you plan on using the land.
Land loans are sometimes confused with construction loans. Construction loans are used to finance the building costs of a home or building. Conversely, land loans are only used for financing the purchase of the land itself.
Are there different types of land loans?
Yes. There are three types of land loans you should be aware of.
Raw land loan: These land loans apply to undeveloped land. In general, undeveloped land has no electricity, sewers, roads, or other improvements. If you apply for a raw land loan, you will need to present a detailed land development plan. Raw land loans are considered the riskiest.
Unimproved land loan: Unimproved land loans apply for land that has some utilities but lacks an electric meter, phone box, or natural gas hookup. Unimproved land loans are easier to get than raw land loans.
Improved land loan: Unlike the other two options, improved land has many standard amenities like water, power, and gas. Improved land loans are the least risky and are similar to mortgage loans.
Furthermore, the land loan calculator can apply to many subclassifications of loan with specialized lenders:
- Vacant land loans
- Farm land loans
- Agricultural land loans
- Recreational land loans
- Business land loans
- Commercial land loans
- Residential land loans
- Construction land loans
How do land loans work?
Each land loan has slightly different requirements. However, they all work the same way.
Like other loans, you will need to have a good credit score to apply for any type of land loan. In general, lenders want borrowers who have a credit score of 720 or higher. For raw land loans and unimproved land loans, lenders may require a higher credit score.
Lenders will look at your entire financial history, not just your credit score. When you apply for a loan, lenders will look at your debt-to-income ratio, liquidity, and full financial history.
How do I use the land loan calculator?
The land loan calculator above will tell you your monthly payments and the expected interest amount. All you need to do is input the size of the loan, the loan terms, and the interest rate associated with your land loan.
What are typical land loan terms?
Because lenders consider land loans risky, they work differently than home loans or construction loans.
Many land loans have short loan terms, ranging from 2 – 5 years. These short loan terms involve a large upfront payment along with high monthly payments.
However, not all land loans are so short. Many lenders offer land loans for 10 – 30 years. But, these long loan terms are often reserved for borrowers with high credit scores.
How much are land loan interest rates?
Since lenders view land loans as risky, they will have higher interest rates compared to home loans or construction loans.
In general, interest rates for land loans start at 5% – 6%. The shorter the loan term, the lower the interest rates will be.
Additionally, the type of land loan will affect the interest rates. Raw land loans will have the highest interest rates. Improved land loans will have the lowest interest rates. And unimproved land loan interest rates will fall in the middle.
When buying land, how much money do I need to put down?
Because land loans are riskier, they will require a larger down payment compared to other loans. In general, lenders will want a 20% – 50% down payment on a land loan.
Risky raw land loans may need a 40% – 50% down payment. Conversely, improved land loans may only need a 20% – 30% down payment.
Lenders will also look at how you plan to develop the land. If you do not plan to develop the land, lenders will offer higher interest rates. However, if you do plan to develop the land, lenders will offer lower interest rates.
Lenders will offer you better interest rates the more you plan to develop the land.
Where do I get a loan for land?
Like other loans, there are many lenders that offer land loans. In general, credit unions and banks are the best places to apply for a land loan.
Since land loans can be complex, you will want to work with an experienced lender who understands the industry. Your loan options will vary depending on the type of land and how you plan to develop the land.