Investing in unoccupied land – whether to build a development, construct your dream home, or hold for future financial returns – isn’t as easy as it sounds.
Land financing can be complicated, particularly if you intend to borrow through a large mortgage lender. Banks hesitate to finance land purchases because they’re high-risk endeavors.
For investors, it’s best to understand the land financing process as best as possible to assure smart land purchases and loan terms.
What types of land loans are there, and how can investors best find land financing? We’ll break it down for you here.
What are Land Loans?
Land loans are a type of credit designed to help buyers purchase a plot of land.
Investors buy land for many reasons: to build commercial or residential developments, build a single-family home, or use the space for farming or agriculture.
How Does Land Financing Work?
Like other property debt, land loans require a down payment from the borrower, charge interest on the loan, and have a pre-set term to complete payment.
Vacant lots don’t offer any collateral for the lender. If the borrower defaults on the loan, the land is unlikely to sell quickly, if at all.
Lenders recognize the risk and define the loan terms accordingly.
Borrowers can expect more substantial down payments (sometimes as much as 50% of the total value), shorter lending terms (often only two to five years), and higher interest rates than traditional home mortgages.
The qualification process is similar to qualifying for a home mortgage.
Lenders will check your debt-to-income ratio, examine your credit report, and require proof of income.
Land financing typically requires borrowers to have excellent credit.
Types of Land Loans
Depending on the location and size of the lot and the intended usage, investors have several land loan options available.
Raw Land Loans
Raw land loans are lender-financed credit that applies to a piece of undeveloped land.
That is, the lot does not have utilities or road access and may not have plans for future development.
This property poses the most significant risk exposure for lenders as there is no infrastructure or buildings to use as collateral. As an investor, it might be challenging to secure financing for a raw land lot.
Lenders who are willing to finance the investment will likely require a large down payment (up to 50%) and expect repayment within just a few years.
Investors can increase their chances of approval by creating detailed development plans and maintaining an excellent credit score.
Vacant Land Loans
Vacant land differs from raw lots in that vacant lots have at least some improvements. These lots are typically ready for construction, with road access and utilities already established.
A vacant land loan suggests the buyer intends to develop the land according to local zoning laws, which represents a lower risk for lenders.
However, these loans might still require 10-20% down and relatively short lending terms.
USDA Land Loans: Rural Housing and Farmland
If the land is in a rural area and will be used for agricultural purposes, the borrower may qualify for a subsidized USDA loan.
These loans secure property that will strengthen existing farming operations, build new farms, establish organic crops, or encourage alternative farming methods like hydroponics, vertical farming, or freight container farming.
The government may also issue USDA Land Loans to applicants who intend to build a primary residence on rural land, particularly if the borrower is low- to mid-income.
USDA Land Loans are a perfect option for borrowers with poor or unestablished credit, low-income applicants, or borrowers who otherwise cannot secure a land loan. The USDA offers several lending options from as little as $0 down.
SBA 504 Loan
The Small Business Administration offers the SBA 504 Loan to businesses using land for commercial development.
With an SBA 504 Loan, the Small Business Administration and an additional lender work together to secure financing for 90% of the total property value.
The business owner supplies the remaining 10% as a down payment. Interest rates and lending terms depend are at the lender’s discretion.
Home Equity for Land Purchases
If you’re a homeowner, you might consider borrowing from yourself to fund your land purchase. A home equity loan allows you to borrow against the equity in your home, without paying a down payment.
For homeowners who have a great deal of equity, this can be an attractive option.
Many lenders will allow homeowners to borrow up to 80% of the equity in their homes. Plus, home equity loans offer substantially lower interest rates than other land loans and often have longer repayment terms.
However, home equity loans come with inherent personal risk. Because your home is the collateral, if you default on your home equity loan payments, you could lose your house.
Seller Financed Land Loans
Some sellers or landowners may agree to finance a land loan themselves.
Since owners undertake significant financial risk by providing private financing, borrowers should expect steep interest rates, large down payments, and short repayment terms.
However, owner financing has its advantages. Because the transaction takes place between private parties, everything is negotiable, from the price of the land to the interest rate and lending terms.
You can work directly with the landowner to find a mutually beneficial solution.
Interested investors can contact landowners directly and inquire about off-market properties, eliminating the need for expensive agent commissions.
Searching off-market properties is simple with Reonomy’s search tools. Find available land anywhere in the nation and connect with landowners directly.
What to Do Before You Apply for Land Financing
Before you approach a lender asking for a land loan, you should already have a detailed outline of your plans for the land.
You’re more likely to secure a loan if you come armed with facts, figures, and a thorough strategy.
Before your loan proposal, consider the following:
1. Have the land surveyed.
You’ll want to confirm the land’s boundaries before presenting your case to a lender. Accurate acreage figures will give the lender a better idea of the plot’s value.
Most lenders require a survey before approving the loan, so take the initiative and get it done early.
2. Check zoning restrictions.
Double-check the zoning requirements for the land you intend to purchase. Depending on the location, you might be bound by very specific zoning ordinances that could impact your future plans.
The lender will want to see that you’ve confirmed zoning for the property before they approve the loan.
3. Check for nearby future development.
Check with the city or county to see the upcoming plans for surrounding lots, neighborhoods, and roads.
New schools, shopping centers, highway improvements, and other municipal projects can increase the value of your property.
Include this information in your loan request.
4. Research needed utilities.
If you’re planning to develop the land, you’ll need access to roads, water, sewer, and electricity. If the property doesn’t have those amenities in place, you’ll need to make sure utilities can be accessed.
Include all estimated road construction and utility costs in your loan proposal.
5. Make a detailed plan for the lot.
The lender will want to know how you intend to use the land. The more details you can provide, the more likely you are to secure the land loan.
Plans for immediate development will lessen the lender’s risk exposure, therefore increasing your chances of approval.
However, if you intend to buy a property with no access to utilities or other amenities, and don’t have a plan to develop the land in the immediate future, expect lenders to require a high down payment and shortened loan term if approved at all.
Best Banks for Land Loans
Now that you’ve developed a plan and identified a financing option, it’s time to find a lender.
Many investors find it difficult to secure a land loan from a large financial institution, particularly for raw land.
However, smaller local banks and credit unions are more familiar with the area and have a vested interest in the community.
If you can provide detailed development information emphasizing the benefits for the community, local banks and credit unions are more likely to provide land financing.
To find local lenders, you can dive into individual land loans in the Reonomy Platform.
Simply search your market of choice, add your desired land lot types, then visit the Debt tab on any parcel to see its current loan and lender.
Additionally, if you’re interested in pursuing an off-market deal with a landowner, start by searching a variety of vacant and raw land parcels.
Reonomy has millions of land parcels nationwide, with detailed lot, sales, debt, ownership, and tax information.
Filter searches by lot size, land type, and zoning options to discover an asset that meets your needs.
You can also find properties likely to sell in the near future or those in pre-foreclosure.
Using this information, investors can contact landowners directly and make an offer before the property hits the market. You could save thousands by merely letting Reonomy guide your search.