How to Finance Land

One of the most difficult steps in buying land is obtaining financing. Simply put: undeveloped land doesn't come with ancillary collateral, like a house or a commercial building. This makes it riskier for the lender because it will be harder to sell and recover the money if the borrower defaults on payments.

The good news? Once you have clarity on what options may work best for you, it will be much easier to begin your search for the perfect property. This article will help you understand what factors lenders frequently consider for land loans and give you a quick overview of common land financing options.

Contents

How to Get a Land Loan

How Land Financing Works

Bank or Credit Union Land Loans

Speciality Agricultural Lenders

Government Programs

Seller Financing

Personal Loans

How to Get a Land Loan

Despite their being more difficult to obtain than a mortgage, thoughtful financial planning can increase your chances of getting approved for a land loan. These are the factors lenders may consider when reviewing your application: 

• Debt-to-Income Ratio: 30-40% is usually considered acceptable for land loans.
• Credit Score: The preferred credit score varies among  lenders, but 650 and up is considered good.
• Down Payment: The Federal Deposit Insurance Corp (FDIC) sets minimum down payment requirements for land loans. These range from 15-35% depending on the type of land, with undeveloped, raw land requiring the highest down payment. Keep in mind that these are minimums, and many lenders require up to 50% down.
• Consistent Income: Simply put, this means a set or fixed income paid from the same source on a regular basis. Commission based jobs may have further restrictions or exemption requirements. 
• Collateral: Because undeveloped land represents a bigger risk to lenders, you may need to provide another piece of owned property as collateral. 
• Intended Use: If you plan to buy land and immediately start building, obtaining a land loan will likely be easier because it means less risk for the lender. Getting a loan for land you do not plan to develop will be more difficult. Make sure you come to the table with a detailed plan of how you intend to use the land you want to purchase.

How Land Financing Works

Land financing works differently than financing a home depending on the type of loan. In general, expect higher interest rates and shorter terms. 

Below are quick overviews of different land financing options you can explore. Take the time to carefully research several loan types as well as lenders so you can find the best terms possible for your needs.

Note: The lenders listed below are examples only and are not recommendations by or affiliated with Acres. These links are meant to help you start your search because let’s face it: land loans are hard to come by unless you intend to build. Research all potential lenders carefully and, if possible, consult a financial advisor before making a decision.

Bank or Credit Union Land Loans

Not all banks or credit unions offer land loans, and it’s far easier to find bank loans for residential land or lots you intend to build on. Here are a few banks and credit unions that offer land loans without the requirement to build or develop:

• American Farm Mortgage & Financial Services
• Bank First
• Clear Mountain Bank
• Loan Star Ag Credit
• Old National Bank

Specialty Agricultural Lenders

If you are buying agricultural land to start or expand your farming operation, there are numerous lenders that specialize in financing farmland. The agricultural lenders might provide more flexibility in structuring a loan than a traditional bank would offer, longer terms, or lower rates. Several examples of specialty ag lenders include:

• AgAmerica Lending
• American Farm Mortgage & Financial Services
• American AgCredit
• Farmers Business Network
• Farm Credit Services of America

Government Programs

Most government lending programs for land are intended for agricultural purposes or for individuals looking to build a home in a rural area. Veterans also have lending options available through the government. Here are common government financing options:

• FHA Construction Loans: A loan backed by the Federal Housing Administration that covers not only materials and construction but also the purchase of land.
• USDA Farm Ownership Loans: For farmers and ranchers looking to purchase, improve, or expand their operations. The maximum loan amount is $600,000 and covers up to 100% of financing.
• USDA Rural Housing Site Loan: Allows you to purchase land with the purpose of constructing a single-family home in a qualified rural area. Income restrictions apply.
• VA Purchase Loan: For qualified U.S. Veterans. This loan covers the construction of a single-family home, but in order to purchase land with this type of loan, you must immediately begin building once you buy the property.

Seller Financing

If traditional financing is not an option, it may be possible to get seller financing. In this case, the owner of the property and the buyer agree on an interest rate, term period, and the consequences of the buyer defaulting on payment. This is recorded in a promissory note, which is simply a written promise for the buyer to pay the seller and the land frequently serves as a security interest for the seller loan.

While all terms are negotiable for seller financing, do not expect better terms than a bank loan. Seller financing often comes with a higher interest rate, a heftier down payment, or shorter terms. It’s wise to consult a financial advisor or legal professional before entering into this type of agreement.

Personal Loans 

Personal loans can be used for just about anything (including land), but most lenders only allow you to borrow up to $45,000. The pros of personal loans include fewer fees, fast funding, and the ability to secure a loan without providing collateral. However, the repayment period is much shorter and interest rates can be higher. Additionally, personal loans usually call for a credit score of 650 or higher.

Final Thoughts

Financing land can be a challenge at first, but careful financial planning and a thorough vetting of options will help you overcome obstacles more smoothly. Before you start looking into lenders, evaluate:

• Your current financial health, including income, credit score, and debt-to-income ratio.
• How you intend to use land once you purchase it.