Land Loans: What Property Buyers Should Know

There is no single best land loan for everyone, so it’s important for buyers to shop around to find the best loan for their situation.

Developing a comprehensive land use plan determines the best loan type and repayment term. Land loans aren’t as standard as mortgage loans, so options may be limited.

What are land loans?

Land loans are used to buy a vacant lot to (eventually) build a home on or develop the raw land later.

Because land is much harder to sell (than a home), land loans tend to be riskier for lenders than mortgage loans.

Owners of raw land are more likely to default and walk away from the property in the event of a financial crisis.

That’s primarily because the demand for land is smaller than the demand for new and existing homes.

So, if a lender needs to foreclose on the land, it cannot guarantee that it will get its money back promptly.

As a result, lenders require a substantial down payment (30-50%), charge higher interest rates, and typically offer adjustable-rate mortgages.

5 Types of Land Loans

There are five common types of land loans you can get to finance your land purchase, each with its own terms and features.

1) Lender Land Loans

Local financial institutions know the area and can better assess the value of the land and its potential, so community banks and credit unions are more likely to offer land loans than large national banks.;

Some lenders, however, may be willing to accept a lower down payment and charge lower interest rates if you plan to build on the land soon.

Also, local lenders are more likely to offer longer repayment terms, giving you more time to repay the debt.

2) USDA Rural Housing Site Loans

If you’re building a primary residence in a rural area, the U.S. Department of Agriculture (USDA) offers several loans that can help.

Section 523 loans are designed for borrowers who plan to build their own homes, while Section 524 loans allow buyers to hire a contractor to make the home for them.

Both loans are designed for families with low to moderate incomes and have a repayment term of just 2 years.

Interest rates, however, can be low. Section 523 loans, for instance, charge just 3%, while Section 524 loans charge the current market rate.

3) SBA 504 Loan

Buyers may qualify for a 504 loan through the U.S. Small Business Administration (SBA) if you’re a business owner planning to use the land for a business.

With a 504 loan, the SBA and a lender help contribute to the costs of the land purchase:

The SBA provides a loan for 40% of the purchase cost.
A lender provides a loan for 50% of the purchase cost.
Buyers contribute 10 percent in the form of a down payment.

SBA loans come with a 10- or 20-year repayment period, and the interest rate is based on current market rates.

The terms of the loan vary, depending on the lender.

4) Home Equity Loan

Buyers with an existing home with significant equity may get a home equity loan instead of a land loan.

5) Seller Financing

Sometimes, the person or company selling the land may be willing to offer short-term financing.

But the seller isn’t in the lending business and doesn’t have a broad portfolio of loans like a community bank or credit union, so buyers typically pay higher interest rates and higher down payments, and the loan usually has a balloon payment.

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Land Loans: What Property Buyers Should Know

There is no single best land loan for everyone, so it’s important for buyers to shop around to find the best loan for their situation.

Developing a comprehensive land use plan determines the best loan type and repayment term. Land loans aren’t as standard as mortgage loans, so options may be limited.

What are land loans?

Land loans are used to buy a vacant lot to (eventually) build a home on or develop the raw land later.

Because land is much harder to sell (than a home), land loans tend to be riskier for lenders than mortgage loans.

Owners of raw land are more likely to default and walk away from the property in the event of a financial crisis.

That’s primarily because the demand for land is smaller than the demand for new and existing homes.

So, if a lender needs to foreclose on the land, it cannot guarantee that it will get its money back promptly.

As a result, lenders require a substantial down payment (30-50%), charge higher interest rates, and typically offer adjustable-rate mortgages.

5 Types of Land Loans

There are five common types of land loans you can get to finance your land purchase, each with its own terms and features.

1) Lender Land Loans

Local financial institutions know the area and can better assess the value of the land and its potential, so community banks and credit unions are more likely to offer land loans than large national banks.;

Some lenders, however, may be willing to accept a lower down payment and charge lower interest rates if you plan to build on the land soon.

Also, local lenders are more likely to offer longer repayment terms, giving you more time to repay the debt.

2) USDA Rural Housing Site Loans

If you’re building a primary residence in a rural area, the U.S. Department of Agriculture (USDA) offers several loans that can help.

Section 523 loans are designed for borrowers who plan to build their own homes, while Section 524 loans allow buyers to hire a contractor to make the home for them.

Both loans are designed for families with low to moderate incomes and have a repayment term of just 2 years.

Interest rates, however, can be low. Section 523 loans, for instance, charge just 3%, while Section 524 loans charge the current market rate.

3) SBA 504 Loan

Buyers may qualify for a 504 loan through the U.S. Small Business Administration (SBA) if you’re a business owner planning to use the land for a business.

With a 504 loan, the SBA and a lender help contribute to the costs of the land purchase:

The SBA provides a loan for 40% of the purchase cost.

A lender provides a loan for 50% of the purchase cost.

Buyers contribute 10 percent in the form of a down payment.

SBA loans come with a 10- or 20-year repayment period, and the interest rate is based on current market rates.

The terms of the loan vary, depending on the lender.

4) Home Equity Loan

Buyers with an existing home with significant equity may get a home equity loan instead of a land loan.

5) Seller Financing

Sometimes, the person or company selling the land may be willing to offer short-term financing.

But the seller isn’t in the lending business and doesn’t have a broad portfolio of loans like a community bank or credit union, so buyers typically pay higher interest rates and higher down payments, and the loan usually has a balloon payment.

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Insert Tagline Here

Land Loans: What Property Buyers Should Know

There is no single best land loan for everyone, so it’s important for buyers to shop around to find the best loan for their situation.

Developing a comprehensive land use plan determines the best loan type and repayment term. Land loans aren’t as standard as mortgage loans, so options may be limited.

What are land loans?

Land loans are used to buy a vacant lot to (eventually) build a home on or develop the raw land later.

Because land is much harder to sell (than a home), land loans tend to be riskier for lenders than mortgage loans.

Owners of raw land are more likely to default and walk away from the property in the event of a financial crisis.

That’s primarily because the demand for land is smaller than the demand for new and existing homes.

So, if a lender needs to foreclose on the land, it cannot guarantee that it will get its money back promptly.

As a result, lenders require a substantial down payment (30-50%), charge higher interest rates, and typically offer adjustable-rate mortgages.

5 Types of Land Loans

There are five common types of land loans you can get to finance your land purchase, each with its own terms and features.

1) Lender Land Loans

Local financial institutions know the area and can better assess the value of the land and its potential, so community banks and credit unions are more likely to offer land loans than large national banks.;

Some lenders, however, may be willing to accept a lower down payment and charge lower interest rates if you plan to build on the land soon.

Also, local lenders are more likely to offer longer repayment terms, giving you more time to repay the debt.

2) USDA Rural Housing Site Loans

If you’re building a primary residence in a rural area, the U.S. Department of Agriculture (USDA) offers several loans that can help.

Section 523 loans are designed for borrowers who plan to build their own homes, while Section 524 loans allow buyers to hire a contractor to make the home for them.

Both loans are designed for families with low to moderate incomes and have a repayment term of just 2 years.

Interest rates, however, can be low. Section 523 loans, for instance, charge just 3%, while Section 524 loans charge the current market rate.

3) SBA 504 Loan

Buyers may qualify for a 504 loan through the U.S. Small Business Administration (SBA) if you’re a business owner planning to use the land for a business.

With a 504 loan, the SBA and a lender help contribute to the costs of the land purchase:

The SBA provides a loan for 40% of the purchase cost.

A lender provides a loan for 50% of the purchase cost.

Buyers contribute 10 percent in the form of a down payment.

SBA loans come with a 10- or 20-year repayment period, and the interest rate is based on current market rates.

The terms of the loan vary, depending on the lender.

4) Home Equity Loan

Buyers with an existing home with significant equity may get a home equity loan instead of a land loan.

5) Seller Financing

Sometimes, the person or company selling the land may be willing to offer short-term financing.

But the seller isn’t in the lending business and doesn’t have a broad portfolio of loans like a community bank or credit union, so buyers typically pay higher interest rates and higher down payments, and the loan usually has a balloon payment.

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