Loans for Land – How and Where to Apply

While loans for land aren’t the most popular type of loan out there, knowing where to apply and what to look for is important. Land can be used for building a property, investing, or for agricultural purposes – the land used for the latter purpose is also known as raw land, i.e. land that will not be improved. Whether you are looking forward to purchasing a lot to build your own home, or want to diversify your portfolio, there are various types of financial aid available for purchasing land.

Understanding Land Loans
Land loans are designed to help those people who want to purchase a lot or land but don’t have all the funds to pay for it or want to leverage their investment. Land loans require the borrower to show the land’s measurements, lines, easements and access. In the case of lots that will be improved, the borrower should contact local officials to know about zoning requirements .Generally, getting a loan for a lot that will be used to construct a property is easier than getting one for raw land. This is because in the case of a lot there is a possibility of an additional collateral - the property which will be built in the near future.

Features of Land Loans
Land loans differ from traditional loans in many aspects. Lending money is considered risky by banks and financial institutions. This is why there are less funding options available when compared to funding for residential properties. For this reason, they may put certain conditions before lending money. Some features include:

- Finance up to 90% of the land’s appraised value or purchase price (whichever is lesser)
- Loans for up to several hundred thousand dollars
- Easy loan process
- Terms of up to 30 years

Land Loan Options
Given the risk involved in lending for land, there are not many options available for this purpose. The higher your initial down payment and income the easier will be for you to get approved, especially, for the purchase of raw land.

 
Farm Service Agency (FSA) – As a part of the U.S. Department of Agriculture, the FSA offers loans for people that want to purchase land or improve their existing lot. No down payment is required in this case and the maximum amount that can be borrowed is $300,000. There is no minimum. To apply for this loan, the person should have managed a farm on a daily basis for at least three years.

Small Business Administration (SBA) – The Small Business Administration offers land loans under its 504 Loan Program. The loan has fixed rates and a long term (10 to 20 years). Only owners of small businesses can apply for it. A 10% down payment is required and the loan can be used for purchasing and/or improving land. The maximum amount of money that can be borrowed is $2 million.

VA Loans – VA loans are loans for veterans that want to purchase a loan to build a home for living space. Loans can also be used for constructing a home if the veteran already owns land.

Seller Financing – Seller financing is a common type of financing when it comes to buying land. All terms will be discussed and agreed on with the current land owner. Owners may require a down payment of up to 50% of the land’s price.

Bank Land Loans – Banks can borrow you some funds if you need to purchase land. Banks will require all information about the land. Interest rates are higher than those of mortgages. A collateral may be required.

Credit Union Land Loans – Usually they are easier to get than land loans offered by banks. You will also have to provide them with the land info and its intended use.

Mortgage Broker – They are bank intermediaries that will help you get a land loan. The benefit of hiring one is that they shop around for the best land loan terms available.

Home Equity Loan – You can also apply for a land loan via a home equity loan. In this type of loan, you will have to own a property that will be used as a collateral for the land you want to purchase. Interest is tax deductible.

Use of Loans
The use of land loans includes:

- Purchasing land
- Improving existing land
- Constructing a property in a lot

What they should not be used for:

- Purchasing a home
- Education
- General expenses
- Mortgage or rent

 
Pros and Cons
Land loans have the following pros:

- Little down payment required in some cases
- Variety of government programs that offer them
- Long maturities

Cons include:

- Not so easy to get approved
- Higher interest rates than mortgages

Eligibility of Land Loans
In general, the following are the criteria that institutions will analyze after you deliver your application:

- Capacity to repay debt
- Age
- Income amount and stability (applicant and spouse if applicable)
- Number and value of assets
- Saving habits
- Educational background
- Number of dependents
- Good credit score

How to Apply for Land Loans
To apply for a land loan, you need to provide the financial institution with your personal information, current assets and other financial information, intended purpose of the land you are looking forward to purchasing, and amount needed. Also, you should provide them with land info such as measurements, access, etc. Usually, you can apply online by filling the forms required by the institution.

 
FAQs of Land Loans

Why are interest rates in land loans higher than in mortgages?
Financially speaking, the more risk a bank or institution takes, the more money they expect to earn. Land, especially raw land, is not looked favorably as a collateral by banks. In the case of a mortgage, the financial institution can sell or rent the property if the borrower defaults. With land, renting is not an option and selling it is not so easy. Choosing a home equity loan will probably give you the best interest rates for purchasing land.

Should I choose a local or a non-local lender?
Local lenders usually give you better terms. This is because they know the area while non-locals don’t. Thus, non-local lenders are very prudent in this respect.

How can I improve my chances of getting approved?
The best way to do this is to have a plan and show it to your lender. You should come up with a very specific plan about what you intend to do with the land. Also, higher down payments and income stability will help you.