Land loans are used to finance the purchase of land for property or future development. Like traditional loans, they require a down payment and must be repaid with interest. There are a few types of land loans, depending on the type and intended use of the land you want to buy.

Land loans aren’t as common as traditional mortgages, and not every lending institution offers them.

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What is a land loan?

A land loan is used to finance the purchase of a tract of land. Land loans are sometimes referred to as lot loans and differ from traditional mortgages in several ways.

In a nutshell, you can use a land loan to buy a tract of land for any purpose. That could mean building your dream home or developing a new shopping mall.

However, land loans are not intended for developers who plan on building immediately. In that instance, you would more likely need a construction loan.

Land loans are more appropriate for buyers who want to buy a piece of land for future use. Say you know you want to build your dream home on the land someday, but it’ll be a few years.

Also, keep in mind that land loans are not one-size-fits-all. There are many types, and the kind of loan you take out will depend on how you plan on using the property.

The three most common are listed below.

Raw land loan

Raw land is precisely what you might expect: completely untouched. There is no infrastructure, such as sewer lines or electricity, that helps make it buildable.

Lenders consider raw land a risky investment because it can take so long to develop. Because of this, you will likely have to pay a hefty down payment—sometimes as much as 50%.

Unimproved land loan

Unimproved land is like raw land, but it has some basic infrastructure attached. It may contain older outbuildings or other structures, but not a house. Typically, those structures do not have natural gas, an electric meter, or a phone connection.

Lenders consider unimproved land slightly less risky than raw land, as it’s conducive to building.

Improved land loan

Improved land is ready for building—immediately. Also referred to as “lots,” parcels of improved land already include utilities and roads.

Improved land may be more expensive to buy due to the existing amenities, but it’s easier to get a loan for it (and your interest rates will be cheaper!).

Key Takeaway Since raw land has an unclear return on investment, expect to pay a large down payment and very high interest rates if you take out a land loan. The riskier your investment, the more you’ll have to pay.

MORE: What is a new home insurance discount?

How do land loans work?

A land loan works much like a traditional mortgage. Both require a down payment, use the property purchased as collateral, and are paid back over time.

When applying for a land loan, you will work with a loan officer to check your employment history and credit. Various lenders, including credit unions, banks, and government programs, can offer land loans.

Not every institution that offers mortgages also offers land loans.

Although land loan borrowers follow the same sort of process as taking out a traditional mortgage, they usually have fewer lenders to choose from. In addition, they’ll likely be required to put more money down and have a higher credit score.

That’s because no matter what type of land loan you request, this loan is considered a greater risk to the bank than a traditional mortgage.

The Federal Deposit Insurance Corp. (FDIC) sets the minimum down payment standards for land loans. They are:

Raw land: Minimum down payment of 35%

Unimproved land: Minimum down payment of 25%

Improved land: Minimum down payment of 15%

Lenders may also set more stringent standards if they wish.

Boundaries, zoning, and access

In setting standards for land loans, institutions take boundaries, zoning, and access into serious consideration.

Boundaries: Lenders will want to see your boundaries (marked by a land surveyor) to be clear about what your purchase entails.

Zoning: The bank will also want you to use local zoning information to determine what’s in store for the property and the surrounding area—and how this might impact your return on investment.

Access: Lastly, if you plan on building a home or business, access to utilities and roadways is a must. Lenders will consider how easy it is to access infrastructure on your proposed land plot.

Planned use

Obtaining land financing also rides heavily on your intended use of the property. This is because the bank’s risk exposure is directly tied to how you plan to develop your land.

There are three planned use categories, each presenting a different level of risk to the lender:

Build immediately: you want to buy a build-ready lot and start construction immediately. This is relatively low-risk for the bank as far as land loans go.

Improvements needed: this type of land has some potential pitfalls, but usually still comes with a manageable development timeline.

Speculative investment: the riskiest type of land loan, this involves raw land with no immediate plans to build or develop. These loans require the highest down payment.

Key Takeaway Land loans have a similar structure to traditional mortgages. Both are used to make a lump sum purchase and must be paid back in a specified period with interest. The main difference is that it is more difficult to qualify for a land loan.

MORE: How much should you pay for home insurance?

How to get a loan for land

Getting a land loan is typically more difficult than getting a home mortgage. Those that do qualify must be very specific about the land and its intended use. Many lending institutions don’t even offer land loans at all.

Steps to apply for a land loan

The first step in getting a land loan is to find a lender that offers the type of loan you need. Once you’ve done that, you’ll need to:

Prepare your financial documents, including tax returns and an updated balance sheet

Consider options for collateral

Hire a land surveyor to get an official report

Put together information on how you plan to use the land

How to qualify

Each lending institution has different qualifiers for loan applicants, but you can expect some common requirements. To get a land loan, borrowers must:

Have excellent credit—typically 720+

Provide documentation of their

DTI

(debt-to-income) ratio

Have steady income

Explain their intended use of the land

Offer a substantial down payment

Loan options

Fewer institutions offer land loans than regular mortgages, but there are still plenty of choices. Some of the most popular lenders for land loans include:

Banks and credit unions: while not all financial institutions offer land loans, you’ll find many that do. Local credit unions are often your best bet, and some specialize in this type of financing.

Seller financing: the property owner may give you a loan for the purchase. This is a good alternative when traditional options aren’t available.

Home equity loan: if you have a significant amount of equity in your home, you may be able to take a loan to cover the purchase of land. If you don’t have enough to buy land outright, you can also use equity to cover the down payment.

Other options may include personal loans, USDA loans, SBA loans, and government programs.

Key Takeaway Developing a comprehensive report of what you plan to do with your land can help you determine what type of loan you need and what kind of lender will help you reach your goals.

Pros and cons of land loans

Pros

Land is an excellent investment

Build your dream home or business from scratch, exactly the way you want it

Work on your own time, taking years if necessary

Government assistance programs may be available to help with costs

Cons

It can be challenging to find a lender

You must pay for your survey and review zoning rules

You may be charged very high interest rates

There may be a shorter repayment period than normal

MORE:

What’s the difference between a builder and a general contractor?

Can you get insurance for land?

You can—and should—get insurance for your land. Just like homeowners insurance protects you if someone gets injured at your house, vacant land insurance protects you if someone gets injured on your plot.

Since there are no structures on undeveloped land, vacant land policies are liability-only. That means they ONLY cover injuries to others—not damages to your possessions.

It can be helpful to check with your current insurance agent, as many homeowners insurance policies automatically extend to vacant land.

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Can you finance land for 30 years?

Loan repayment terms can vary significantly depending on the lender. Land loan terms are typically anywhere from 5-30 years, but some institutions want repayment in as little as two.

Is owning land a good investment?

Even though purchasing land is risky, it can also be highly profitable. To increase your chances of a good return on investment, do your research beforehand and enter into the deal with a clear plan for the future.

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