Land loans

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Page written by Chris Godfrey. Last reviewed on September 12, 2024. Next review due October 1, 2027.

If you’ve found a plot of land that you want to buy, but you’re not ready to start construction, you’ll need a special type of loan to finance the purchase. Land loans are designed specifically for this purpose, but they can come in different shapes and sizes and have different sets of rules. Read on to find out what kind of land loan works best for you.

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What is a land loan?

A land loan – or lot loan – is a type of financing used to purchase a plot of land, whether for residential or commercial purposes. Unlike a commercial mortgage, which is used for purchasing existing structures, a land loan specifically funds the acquisition of undeveloped property. These loans can also come in various forms, depending on the land’s intended use, zoning, and development status.

Note that land loans are different from construction loans, which are designed to cover the cost of land and building costs for projects that have immediate start dates. Land loans are typically used to purchase a plot of land for future use – sometimes several years ahead and where construction plans or use of the property may not be fully defined.

Land loans typically have shorter repayment terms than mortgages and carry higher interest rates due to higher risk. Borrowers may be required to make significant down payments, ranging from 20% to 50%. Lenders may also require detailed plans for land use before approving the loan.

How do land loans work?

Land loans work similar to standard commercial mortgages:

Land loan qualifications:

Although different types of land loan will require slightly different loan qualifications, the general requirements remain the same:

Good credit score (FICO +680)
Solid financial history – the longer you’ve been in business the better
Planned use of the land
Highlight necessary property checks, like zoning, land-use restrictions, surveyed boundaries and access to utilities
Provide environmental studies if required

Loan process

The lender provides a loan offer that sets out the interest rates and other terms and conditions
If the borrower accepts the loan, they are required to make their down payment – 20% to 50% of the purchase cost
The borrower pays the loan back in instalments
Once construction is complete, the borrower can refinance the land with traditional commercial real estate. Refinancing can secure a new principal balance, longer loan term and a lower interest rate

What are the different types of land loans?

Types of land loans include:

Raw land loan

For undeveloped land without utilities or structures. These types of loan are riskier for lenders, as the land is not immediately usable for construction. As a result, they often require larger down payments – 30% to 50% – and will usually incur higher interest rates.

Unimproved land loan

For land that has some infrastructure, like roads or utilities, but still lacks certain services. Because this type of land is more valuable than raw land, lenders may accept a slightly lower down payment and will usually charge lower interest rates.

Improved land loan

For land that is ready for construction, with access to necessary utilities such as water, electricity, and sewage systems that make it easier to develop. These types of land are the most valuable, which means they are less risky to finance. Improved land loans have the most favorable terms.

What are the pros and cons of land loans?

Land loans come with several advantages and disadvantages, depending on the type of land and the intended usage:

Pros:

Opportunity for customization: A land loan allows you to buy a plot and build a custom business or investment property to your unique specifications
Investment potential: Land purchases, particularly in growing or developing areas, can be a lucrative long-term investment as property values typically appreciate over time
Lower purchase price: Compared to buying property with existing structures, land is often cheaper, making it more affordable upfront if you’re not ready to build immediately
Flexibility of use: Depending on zoning laws, land can be used for residential, commercial, agricultural, or recreational purposes, providing options for various development opportunities
Less competition: Fewer buyers are typically interested in raw or unimproved land, giving you more negotiating power and a greater chance of finding a good deal

Cons:

Higher interest rates: Land loans are considered riskier by lenders. This drives higher interest rates than traditional mortgages. If there is no plan to develop the land quickly and refinance the finished project with a commercial mortgage, the cost of borrowing can be significantly more expensive
Large down payments: Lenders often require down payments of 20-50%, making it a capital-intensive investment compared to a mortgage on a developed property
Shorter loan terms: Repayment periods for land loans are typically shorter (5-15 years), leading to higher monthly payments. This can strain cashflow, especially if you’re not developing the land immediately
Stricter loan criteria: Lenders usually require strong credit, detailed land-use plans, and may even ask for environmental or zoning assessments. This can add time, costs and complexity to the loan process
Carrying costs: Even if you’re not building right away, land ownership incurs ongoing costs such as property taxes, insurance, and maintenance

How do I get a land loan?

Terms, conditions, fees and interest rates for land loans can vary significantly, so it makes sense to shop around before settling on a deal. You can do this by approaching banks, credit unions and online lenders one by one, or you can use the services of a loan marketplace that will introduce you to a choice of land loans from a range of different lenders. Some marketplace platforms can also give you advice and help you with the loan application process. This can be especially useful for business owners who have never taken out a land loan before.

What are the alternatives to a land loan?

Alternatives to a land loan include construction loans, which can finance both land purchase and building costs, making them ideal for those planning immediate development. Home equity loans or HELOCs (Home Equity Lines of Credit) allow you to borrow against the equity in your existing property to finance land purchases. Additionally, personal loans can be used for land purchases but may come with higher interest rates. Some seller financing options may also be available, where the land seller acts as a bank and provides financing directly. Lastly, some US government programs, such as USDA loans, may offer affordable land loans for businesses in rural areas.

Get started with Swoop's business funding platform

No matter if you’re business owner seeking your first land loan or you’re a seasoned borrower, working with business finance experts can make all the difference when applying for funding. Contact Swoop to discuss your borrowing needs, get help with your application and to compare high-quality land loans from a choice of lenders. Register with Swoop today.

Written by

Chris Godfrey

Chris is a freelance copywriter and content creator. He has been active in the marketing, advertising, and publishing industries for more than twenty-five years. Writing for Wells Fargo Bank, Visa, Experian, Ebay, Flywire, insurers and pension funds, his words have appeared online and in print to inform, entertain and explain the complex world of US consumer and business finance.

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