Land Loans: Government and Private Options

by Laura Mueller

When it comes to financing your land purchase, getting the funds isn’t always quite as simple and straightforward as it would be if you were buying a property with a conventional mortgage. Traditional mortgage options are hard to come by for land loans, and lenders who do offer them tend to tack on higher interest rates and shorter pay-back periods—both of which could be tricky to manage, especially if you’re buying on a budget.

So, what are your next best options? Many borrowers use government or private loans to finance their purchases, which offer a bit more flexibility when the big banks aren’t a good fit. Which one is right for you will depend on your eligibility, where you’re buying, and what your current financial situation looks like, but here’s a quick look at what some of your available land loan options might be.

Government Loans

FSA loans– Individuals who are buying land for farming or ranching purposes may be eligible to receive a low-interest FSA loan through the USDA Farm Service Agency’s Farm Loan Program. These include both farm ownership loans for expanding existing properties and microloans for small and beginning farmers, plus targeted loans for minority and women farmers and ranchers.

USDA construction loans – If you’re buying land to live on in a rural area, then check to see if you qualify for a USDA Construction Loan, which will help you pay for both the land itself and the structure that you intend to build there. You’ll only be on the hook for interest payments while your residential property is being built, after which the loan will switch over to a more traditional home loan with both principal and interest payments due each month.

Federal and state grants
– While not loans per se, it’s worth checking to see if you qualify for any federal or state grants for your land purchase. There are lots to go around, covering things like land conservation, improvements, and agriculture, and you may be able to find grants through private organizations as well.

Private Loans

Home equity loan – If you have equity through an existing conventional mortgage then you may be able to get favorable rates on a home equity line of credit—also known as a HELOC. From there, you can use the credit as you see fit, including for the purchase of land.

Seller financing – There’s a chance that your seller is open to working with you directly on financing by extending credit for your purchase. Keep in mind that this route usually demands the seller own the property outright, and you’ll definitely want a lawyer to look over the contract before you sign to ensure it’s air-tight.

What About Bank Loans?

Bank loans for land might not be as favorable as they are for traditional housing, but they are available. Types include:

Raw land loans for completely undeveloped properties.

Unimproved land loans for mostly undeveloped properties—i.e. those that are primarily raw but may have some utilities ready to go.

Improved land loans for land that is good to go with utilities and access points.

In general, the more unimproved the land you want to buy, the riskier the loan and the higher the interest rates are going to be. Make sure to shop around, and extend your search to small banks, which may be more open to financing your land investment.

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by Laura Mueller

Planning to make a land purchase? Unless you’re going to be paying entirely in cash then you’re going to need to secure a land loan—and that’s going to require a down payment. Down payments for land loans operate a bit differently than down payments for traditional real estate purchases though, and it’s important to understand what’s expected of you so that you can be sure to find a plot of land that fits within your budget. To help you do the math, we’ve broken down some of the key factors to know about down payments for land loans.

How Much is a Down Payment for Land?

Generally speaking, a lender will require anywhere between 20% and 50% of the purchase price for land in order to secure a loan. Why is it so high? Land is considered a riskier investment than houses and other structures, and lenders want to be sure to get as much principal up front as they can. That being said, it is possible to find lenders who will allow you to get funding without putting so much down. If you’re on the hunt for one, work with a mortgage broker so you can be sure you get a full view of all of your available lending options.

Factors That Affect Your Down Payment Amount

You won’t know exactly what your lender is going to request as a down payment until you speak with them, but there are some factors that may suggest your down payment will be higher or lower on the spectrum. For example, down payments for raw land tend to be higher than down payments on improved lots or land that you intend to immediately build on. Your previous lending history may come into play here as well.

Remember: it comes down to risk for the lender. The more risk they think they’re taking on, the more money they’re going to require from the buyer up front. Raw, unimproved land is perceived to be riskier, and as such, you can reasonably expect your down payment to be higher.

What About Interest Rates?

In most cases, the higher your down payment for a land loan the higher your interest rate is going to be too. While it might not seem fair—after all, you’re taking on less interest to begin with—lenders don’t see huge dollar signs when providing loans for raw land. A lot can happen between the purchase of your land in an unimproved state and the plans that you have for it, and you’ll likely need to come up with a large amount of additional funding to get your raw land to a profitable state. As a result, lenders tend to tack on higher interest rates to these high-risk loans to ensure that they get as much of a return as possible.

So what’s your best bet for getting a good deal on your down payment? Go into the lending process with a clear and concise proposal about your plans for optimizing your land investment, including the direct steps that you’ll take to get there. The more you can prove to a lender that they’re making a smart choice lending you the money, the more favorable your loan terms should be.

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