Learn how to land the funds you’ll need to purchase property
Getting a loan for land requires understanding the three main types: raw land loans for undeveloped plots, unimproved land loans for partially developed property, and improved land loans for land with utilities.
Your credit score and financial health determine your loan terms, so you should aim for a 720+ credit score and low debt-to-income ratio to secure better interest rates.
You need at least a 15% down payment for most land loans, so confirm you have the funds ready before applying, as requirements are stricter than conventional mortgages.
Hiring a local real estate agent helps you navigate zoning laws and loan options, ensuring your purchase aligns with your development plans and long-term goals.
So, you’ve discovered a plot of land that’s the perfect space to build your next home. Now what?
If you don’t have enough cash on hand to buy land, you’ll likely need a loan to cover the cost of purchasing and building on the land. However, getting a land loan is different from taking out a mortgage. Use these helpful tips to secure your dream plot.
Before we break down how to get a land loan, let’s review the basics. For starters, these types of loans are specifically for purchasing a piece of land to build a home or a business in the future.
If you’re looking for a plot to start building your dream home within a year of purchasing, you’ll need to apply for a construction loan instead, and they require a different type of lender than a typical mortgage. But long-term building projects are the perfect fit for a land loan.
Land loans, also known as lot loans, are available in a few different varieties. There are three main types, and you may need assistance from your lender to determine your best option.
Here are the three main types of land loans:
Raw land loan: This type of loan is for buying property that is only a plot of land. If there are any sewers, electric systems, or roads on the property, it won’t qualify.
Unimproved land loan: These types of loans are for properties that are slightly more developed than raw land qualifiers. Unimproved land may have some utilities like gas lines, but lacks other necessary amenities.
Improved land loan: If you’re eyeing up a piece of property that already has access to sewage, electric, and water, then you’ll likely need an improved land loan. These types of loans are the easiest of the three to obtain and typically have lower interest rates.
Like any hopeful borrowers, people looking to get financing to buy land should ensure that all of their financial ducks are in a row. You’ll need to prove to your loan lender that you have a good credit score (720+ is the standard) and verifiable income sources. If you have a solid credit score and a low debt-to-income ratio, you’ll likely receive more favorable interest rates on your loan.
Even if you’re planning to purchase land as an investment, with no desire to build or develop on it, you should still know what the zoning rules are in your area. Research your local zoning laws and determine whether there are potential roadblocks for purchasing or building on your desired plot. Some lenders may be less inclined to lend on plots with strict zoning regulations that could make future sales and transfers tricky or costly.
While ideas can change, you should have a plan in mind for what you want to do with the land. When applying for a land loan, you’ll need to provide your potential lender with details about how you plan to develop the land, as well as how you plan to finance the purchase. Laying out your clearly defined plan for your lender may help them share in your vision, making it easier for them to approve your loan.
Before applying for a land loan, check out other loan options to ensure that you’re making the best choice for your plan.
If your plans involve developing the land into commercial properties, you may want to review the benefits of applying for a small business loan instead. Similarly, if you’re hoping to build your dream home on the plot, talk with your lender about more traditional lending options that could offer better financing options.
It may seem counterintuitive but you need money to borrow money, and that is doubly true with land loans. While conventional mortgages may let you skate by with little to no down payments, a lot loan will often require at least a 15% down payment. Be sure that you have the funds to cover this expense before moving forward with the loan and purchasing process.
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