Land Loans 101: Everything You Need to Know About Getting a Land Loan
The Land Up Dirt to Dollars Series
“Land Up’s lender list and land loans low-down.” If you can say that five times fast, we’re sincerely impressed. But even if you can’t, keep on reading!
If you are considering buying land then understanding financing options is an important first step in the ownership journey.
While there’s a lot of information out there about how to borrow money for a home, there isn’t much out there to help guide you through the process of getting a land loan to purchase raw or unimproved land, a ranch with an existing home, or even a subdivision lot. Through our extensive experience selling Central Texas properties we’ve been able to aggregate knowledge of land loans and are happy to pass it along.
Using a traditional loan to buy land is common but the process does differ from buying a house, we’ll explain
Can you get a loan to buy land?
When it comes to buying land, a traditional land loan is one way to finance the property. Just like a mortgage for a residential property, a lender or bank can help you apply for and secure a loan for land. That being said, these loans and lenders do differ slightly from the residential market.
How are land loans different from home loans?
When compared to a traditional mortgage, land loans tend to have higher down payments (typically around 20% of the purchase price) and interest rates (about 0.5-1% higher) and are shorter term (around 15 years). Some are followed by a balloon payment, or if you’re building a home, a traditional mortgage on that new home. The biggest difference between the residential market and land is the specialization of the lenders.
In residential, lenders will typically finance most types of homes including unattached condos, single family houses, and multi-family houses (like a duplex); but with land, lenders are very specialized with what they finance. Some will only provide loans for unimproved land, some for land that will include a new home build, others land with a new mobile home to be placed on the property. This makes it important for you as a buyer to have a plan for your land going into the process.
Other financing options available to buy land include:
Construction loans
Construction loans help fund construction costs. The loan lasts for only as long as the construction process itself before converting to a 15-30 year mortgage once the build is complete.
Owner financing
Instead of getting a loan from a traditional lender like a bank, you’ll sign a promissory note directly with the seller (the ‘owner’ in ‘owner financing’) and you will make payments to them. When you pay off the note, you will receive the deed to the property just like in a mortgage from a bank lender. Those who are willing to offer owner financing typically are open to buyers who have low credit scores or other situations that might keep them from qualifying for a traditional land loan. In exchange, the buyer typically pays a higher interest rate than with a land loan.
United States Department of Agriculture (USDA) loans
If you’re buying rural land and want to develop low-income, multifamily housing, you may be eligible for this loan. These loans offer competitive interest rates as well as 30-year loan terms.
Home equity loans
If you own your own home, you can use this loan type to purchase the land. In essence, the loan acts as a second mortgage, where you’ll receive the money in one lump sum and then make regular payments on the principal and interest, and there is no down payment. However, your home is the collateral and the interest you pay is not tax-deductible.
Small Business Administration (SBA) 504 loans
If you’re buying a property that is intended to be used for a business, you may qualify for this loan. The SBA works with Texas lenders to offer competitive land loans for real estate purchases and construction. One big benefit of this type of loan is that buyers can finance up to 90% of the purchase price. In order to qualify for an SBA 504 loan the buyer must be below a $15 million net worth ceiling and the business must average no more than $5 million of profit after taxes.
How To get a loan for land
For many buyers, similar to when you are interested in a home, one of the very first steps is prequalifying for a loan. When you start looking (or even before), getting prequalified gives you a good idea of how much you can borrow, which translates to how much land you can afford. Equipped with this info you’ll know the strongest possible offer you can make when the time comes, as well as what financing options are available for your needs and goals.
Prequalification vs pre-approval
Prequalification tends to be a quicker process than becoming pre-approved for a land loan. Your lender will ask for some basic info about your finances – like income, monthly bill payments, and savings amounts – and will run a ‘soft credit check’, which does not impact your credit score. They will determine your creditworthiness to determine how likely and how much you are able to qualify for.
Then, we meet Prequalified’s older brother, Pre-approval. Getting pre-approved for a land loan is a similar process but more detailed. Instead of providing verbal estimates, your lender will have you verify your financials with actual documentation and run a hard credit check.
At the end of the process, the lender will confirm your creditworthiness and have a good indication if you will be approved for the actual loan. You’ll then receive a pre-approval letter detailing the terms and the specific amount you’d be able to borrow. These letters are good for a number of months, should you decide to move forward with the loan.
Why get pre-approved for a land loan? It shows the seller that you’re serious about purchasing the property and will likely be able to complete the transaction — giving the seller (and yourself!) peace of mind and assurance. These approvals also come in very handy when working with a realtor as many times they will need to verify your ability to purchase something before starting the process of searching for properties.
Different types of land for sale
True to its name, a land loan is used to finance a land purchase. There are many types of land out there, and so the restrictions, terms, and options vary. No two properties are the same, and the one you’re looking at is truly unique. BUT, land for sale probably falls into one of the following categories.
Raw Land
Raw land is in its natural state – uncultivated and no improvements. Raw land provides flexibility on what you can do with it (within the local laws, of course). However, because raw land is a blank slate, this tends to be a risky investment for lenders as it takes longer to develop and resell if a buyer defaults on a loan. If applying to purchase raw land, it’s important to have a solid, detailed development plan ready to share.
Unimproved Land
Similar to raw land, unimproved land is typically very uncultivated but is slightly more developed and properties have access to important infrastructure such as electricity, water, and gas lines. The word ‘access’ is key here and doesn’t mean utilities are readily available, but instead the buyer would need to connect to these access points by installing more infrastructure. Working with your realtor will help you understand what this might entail for each specific property. Loans for unimproved land are less of a risk than raw land for lenders, making loans easier to secure.
Improved Land
Improved land, including lot land, has some infrastructure in place, and might already be zoned. It can have some utilities readily available. If you’re looking to build a home, improved land will be easier to work with than the prior two. Lenders are typically more comfortable with improved lands.
Who Are The Best Lenders That Specialize In Land Loans?
When it comes to land loans, local matters. Large national banks don’t always offer land loans so they are typically handled by smaller lenders who are in the same region as the land being purchased. As with many other local businesses, you will often get a more personalized touch from someone who truly understands your needs.
Finding the right lender is imperative for a smooth, positive experience. So, if you are looking to finance your next land purchase, boy do we have some good news! At Land Up, we have collectively sold thousands of acres of land and our agents have worked with a group of knowledgeable lenders along the way – and we’ve put a list together!
So, if you’ve been eyeing a property, (and if not yet, search our inventory), be sure to check out our lender list to help you on your financing journey. Or give us a call anytime to learn more, we look forward to helping you with your real estate needs!