Land Purchase Financing

What is land purchase financing?

Land purchase financing is any type of funding that can be used to purchase a plot of land. This type and amount of financing you will want to obtain will depend on the type of land you are looking to buy.

• Raw land: No utilities and no improvements, very possibly with no road access. Typically the cheapest type of plot, but can be difficult to finance.
• Unimproved land: Some utilities and few improvements. Slightly easier to finance than raw land but still potentially challenging.
• Improved land: Full utilities and road access. The most expensive land plot type but financing is more easily attainable.

How do land loans work?

Applying for and acquiring a land loan is similar to a mortgage, where you will be required to pay back what you have borrowed over a set term, with added interest.

The lender will look at your finances and run a check of your credit to decide whether you are eligible for a land loan.

Some land loans will require a down payment of anywhere between 20% and 50% of the total price of the land.

Land loans will come with higher interest rates and shorter terms than a 15- or 30-year mortgage.

Land loans can also come in the form of a ‘balloon mortgage’ where you are required to pay interest-only or make no payment at all for a certain period, and then you pay back the balance in one large payment.

How much of a loan can I get for land?

There is no particular rule for how much you may be able to borrow with land purchase financing, it will depend on the type of land plot (as outlined above) and the lender.

For example, if you are looking to purchase improved land, you may qualify for 85% of the total cost, however, if you are looking to purchase raw land, you may only qualify for 70% of the total cost.

Therefore, the borrowing amount will be based upon the cost of the land, and how much you have available to put up as a down payment.

Is it difficult to get a land loan?

Compared with a traditional mortgage, it can be difficult to get a land loan because buying a plot of land is so different from purchasing a home.

You will find it particularly challenging to get a land loan through a bank or credit union as you must be explicit about the piece of land you are trying to purchase. You will likely have to provide land surveys and zoning information for the plot before they will consider your application.

Is buying land a good investment?

Buying land can be seen as a good investment if it is in a desirable location although it does depend on how you plan to use the land. For instance, purchasing a plot of improved land to build a home on will have a different amount of risk than purchasing a plot of raw land to use for agricultural purposes.

How can I finance purchasing land?

There are a few options available when looking for land purchase financing:

• Seller Financing: If you are unable to qualify with other lenders, you may have the option to take advantage of seller financing. This is where the seller of the land will offer a buyer a financing plan so that they can pay for the land plot over time. Along with a particularly large down payment, this type of financing often comes with high interest rates and short repayment terms.
• Local Bank or Credit Union: If you are looking to obtain a traditional bank loan, you are better off considering a local bank or credit union as it is beneficial to have a lender who knows the area. With community knowledge, they are better equipped to see the true value of the land as well as its building potential.
• USDA Loan: If you are looking to purchase land to build a primary residence, there are two loans (Section 523 and Section 524) offered by the U.S. Department of Agriculture that can provide you with the financing you need to make the land purchase. These loan programs are available for low- to moderate-income families, with very low interest rates, and a repayment term of two years.
• Home Equity Loan: If you already own a home with significant equity, you could use a Home Equity Loan to finance your land purchase. With repayment terms of 5-30 years, you will not be required to make a down payment and interest rates are typically low as the loan is secured. The downside to this type of financing is that, since your home is used as collateral, there is a risk that you could lose your home if you fall too far behind on repayments.
• Personal Loan: If the plot of land you are looking to purchase is relatively inexpensive, you may want to consider a personal loan. With this type of financing, you will be provided with a lump sum which you then pay back over time with added interest.

If you are looking to purchase the land for your business, you may be able to qualify for an SBA 504 loan. The SBA will pay 40% of the cost, the lender will provide 50% of the cost, and you have to make a down payment of 10%. The interest rate will depend on the current market rates and terms will vary depending on the lender.