Nothing encapsulates the idea of the American dream more than owning property. However, finding the perfect ready-built dream home might not be the easiest of tasks.
Building your own new home or business premises wouldn’t initially cross your mind in today’s day and age. However, finding the right plot of land could allow you to design a building to your specific tastes.
Whether you’ve always dreamed of owning land and building your property or are struggling to find a property that meets your needs, a land loan could be a great financing option.
What are land loans?
Land loans help individuals or small businesses finance the purchase of a parcel of land for development, agriculture, or recreation. Loans for land-only make up a small percentage of the lending market because they’re considered riskier for banks and credit unions.
Existing properties are in much higher demand when compared to vacant lots and rural land. Consequently, if a lender needs to foreclose on a land loan, it is less likely to recover the money through a sale as fewer buyers are interested.
There are three main types of land classification which determine how likely you are to obtain financing for the land you intend to purchase:
Raw Land is untouched and undeveloped land which has not been improved upon in any way. This type of land has no access to utilities like electricity or gas meters and might not even be connected to roads.
Raw Land is typically the most inexpensive type of land. That said, obtaining financing to buy it may be quite difficult. Banks and credit unions are less likely to offer financing for Raw Land as it poses a high risk of abandonment.
In most cases, Unimproved Land would already have access to basic utilities such as road access and phone lines. While these simple utilities may not seem like much, they make a significant difference when the new owners come to develop the land.
Obtaining a land loan for Unimproved Land is easier than for Raw Land. However, it still poses a significant risk to the loan provider since it is not fully improved and ready to be built up.
Fully accessible by road and fitted with access to all utilities, improved land is usually ready for immediate development, making it more expensive to purchase than Raw and Unimproved Land.
Financing for this type of land is the easiest as it poses the least risk to loan providers.
Which banks offer land loans?
Since land loans normally come with higher interest rates than mortgages for ready-built properties, it’s a good idea to evaluate and compare multiple lenders and different types of loan programs before settling on one.
Also, making sure that your chosen financial institution is fully licensed to provide mortgage loans will save you plenty of unnecessary stress. The Nationwide Mortgage Licensing System (NMLS) was set up in 2008 to create a centralized database of licensed and credentialed lenders.
7 Best Banks for Land Loans
Here are some of the best banks for land loans:
- Old National Bank
- WaFd Bank
- Atlantic Union Bank
- Clear Mountain Bank
- Alpine Bank
- California Bank & Trust
- Banner Bank
Old National Bank
Old National Bank offers lending services to Indiana, Minnesota, Wisconsin, Michigan, and Kentucky. Financing packages come in two categories based on the property’s acreage you intend to purchase.
- Lot loans are there to finance land purchases of up to 5 acres and require a 20% down payment.
- Land loans with Old National Bank are available to finance land purchases between 5 and 25 acres.
The minimum down payment for land of more than 5 acres is 35%. Both Land and Lot loans come with various repayment periods and interest rates. Lot and Land financing is available for improved and unimproved land and comes with no obligation to build immediately.
Since its merger with First Midwest Bank, Old National Bank now has 250 banking centers across the Midwest, so you are sure to find a local brick-and-mortar branch where you can discuss your loan needs. However, you also have access to an online loan calculator and online loan application if you don’t have the time to drop into one of their banking centers to speak with a loan officer.
WaFd Bank offers banking solutions in Arizona, Idaho, Nevada, New Mexico, Oregon, Texas, Utah, and Washington. You can get financing for improved land up to $700,000 without any obligation to build immediately.
Use their online loan calculator to estimate the interest and tax rates you can expect to pay based on your credit score, property specifications, and development plans.
You can apply for loans online through their portal or in one of their bank branch locations. Minimum down payments and interest rates vary depending on the loan term, and they also offer lower rates when you opt for a short-term loan.
Atlantic Union Bank
Based out of Virginia, Atlantic Union Bank offers land loans for both undeveloped land and residential lots.
Separate construction loans are also available for you to finance the construction of your dream home. However, they don’t offer services like loan calculators, interest rate guidelines, or down payment information on their website.
You would have to call or visit your local branch to speak to a loan officer about potential financing.
Clear Mountain Bank
Clear Mountain Bank serves north and central West Virginia along with western Maryland. Land loans are offered for residential lots for future development and unimproved land for recreational purposes.
Financing of up to 90% is available on the purchase price of residential lots. Loan information is available through the loan application section on their website, over the phone, or at one of their brick and mortar bank branches.
Alpine Bank offers financial services to the Colorado area. Both lot and new construction loans are available with a maximum loan-to-value amount of 75% on improved land.
Lending details and information on monthly payments are not readily available through their website. That said, you can enquire online, request further information via email or phone, or visit one of their bank branches.
California Bank and Trust
California Bank and Trust, based in California, offers both land loans and construction loans. The bank offers financing of up to 60% of the lot purchase price along with multiple loan options.
One thing which makes this bank stand out is the option to have a single, dual-purpose loan to cover both the land purchase and the construction of your new home at one go to save you time and money.
Minimum down payment, loan term, and interest rates are also not listed on their website. However, you can apply for a loan online, over the phone, or through one of their branches.
Banner Bank offers its financial services to the areas of Idaho, Washington, Oregon, and California. The bank offers financing for purchasing land in an improved and unimproved state to keep options open for potential borrowers.
You can borrow up to 75% of the land purchase price, and they claim to charge competitive interest rates and fees. Loans are approved in-house to streamline the credit score verification and loan approval process.
When choosing Banner bank, you can lock in a fixed-rate or flexible rate of interest which gives you a great deal of flexibility. Financing for construction and personal loans are also available.
How To Apply for a Land Loan
Applying for a land loan is relatively similar to a typical mortgage loan.
Scouring the real estate market for the ideal plot of land would be the first step. Once you’ve decided which piece of land is ideal, you’ll need to draw up (or hire someone to do that for you) a thorough plan for development and construction along with ballpark timeframes.
Next, search for lenders in your area that offer land or lot loans. Each type of land loan has qualifications that potential borrowers need to meet before their loan is approved. The lender will generally need all the documentation concerning plans for developing the land, along with proof that borrowers have an excellent credit score, to be able to start the consideration process.
Banks and credit unions will often run an independent credit check on loan applicants before making any decisions. Potential borrowers would also need to discuss zoning, land-use restrictions, access to utilities, land and boundary surveys, and any concerns. Generally speaking, lenders tend to require significantly higher down payments, charge higher interest rates, and offer shorter repayment periods on land loans when compared to traditional mortgages for ready-built properties.
These measures are put in place to mitigate the risk the lender is assuming when providing the loan. Some banks may offer lower interest rates or longer monthly payment terms to those with better credit scores and debt-to-income ratios.
Bear in mind that land loans are considered very high risk for lenders, so obtaining financing may not be the easiest of tasks. Should financial trouble hit or development plans go south, the chance of an individual not making good on financing for a plot of raw or unimproved land is significantly higher than with a ready-built property.
Homeowners are generally far less likely to give up their residence unless needed. On top of that, foreclosed land is harder to correctly value and sell off as many people find it daunting to purchase land that does not have a property built on it.
Alternative land financing options
The U.S. Department of Agriculture offers financing options for those looking to build their own homes in rural areas. The USDA’s Section 523 loans are for those looking to purchase land to develop themselves, and Section 524 loans are to finance new construction by a contractor.
Loans like these require no down payment and come with low-interest rates. However, they must be paid back within two years. Both Section 523 and 524 loans are designed to help low-income families become homeowners and are restricted by zoning and land-use regulations.
Those looking to buy land and build their residence on it within a short period might want to consider an FHA loan. FHA loans are loans insured by the Federal Housing Administration to protect lenders from risk.
These loans are not available for land purchase alone but are sometimes available in conjunction with a construction loan. Unlike many conventional loans, FHA loans require a low down payment. However, interest rates may be higher to compensate for it.
You may still be considered for an FHA loan even if you’ve declared bankruptcy or suffered foreclosures, disqualifying you from obtaining a traditional mortgage.
Home Equity Loans
Buyers who already own a property and have little to no debt also have the option of considering a home equity loan. Home equity loans are designed to convert your equity into collateral for a new loan to fund your purchase.
Home Equity Loans come in all shapes and sizes, so your best option is to speak to your financial institution of choice about your options.
Homeowners can refinance their homes to free up some equity. Refinancing of this kind is essentially paying off your current mortgage to get into another mortgage with a lower interest rate or easier monthly payments.
Once the remortgaging has taken place, your financial institution will issue a check based on the equity in your property. You may then use this freed-up cash to invest in land!
Business owners could benefit from the 504 loan program offered by the Small Business Administration (SBA).
You would need to finance 10% of the land purchase price, the SBA will cover 40%, and a lender of your choice would need to finance the remaining 50%. Terms on these types of loans vary depending on the lender you choose to fund 50% of the land purchase.
You may be lucky enough to obtain financing from the landowner directly. Down payments for seller financing would usually need to be substantial, and interest rates are generally less competitive.
Seller financing would cost you more than financing through a bank. Unless you don’t qualify for traditional financing, considering this type of loan may not be worth your while.
Whichever financing option you choose to fund your land purchase, always evaluate the terms thoroughly and read the fine print to save yourself from additional stress.
Frequently Asked Questions
Which loan is best for land?
You have plenty of options to choose from when it comes to financing a land purchase to build your dream home or business premises. Consider the terms of the different loans available to you to get the best deal possible.
How hard is it to get a loan for land?
The defining factor in getting a land loan is your credit score and available funds for a down payment. The more stable your financial situation is, the easier it is for you to find a lender.
Should you not qualify for traditional financing, there are other options like USDA or FHA loans to help you.