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Not all personal loan providers will let you borrow money to buy land. Typically, credit unions have the most options when it comes to purchasing property. Otherwise, you might want to consider alternative financing options like a raw land loan or even funding from the USDA Farm Service Agency.
How do personal loans to buy land work?
Some lenders allow you to use a personal loan to buy land without a down payment. It’s different from a mortgage because a mortgage is secured by the property you’re purchasing, whereas buying raw or undeveloped land doesn’t typically include a home you can use as collateral — often resulting in higher rates to compensate the higher risk to the lender.
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How easy it is to get a land loan depends on what you plan on doing with your land once you’ve purchased it.
For instance, it’s easier to borrow money for land that you plan to build a home or business on than it is to buy raw or undeveloped land that won’t be improved. How much land you want to buy also affects whether you can easily get a loan, as do city or county regulations and zoning laws.
You can improve your chances of approval for a land loan by going into the process with a solid plan and a specific piece of land in mind. If you plan to build a primary residence on the property, you further increase your chances of lender approval, while buying land for unknown future uses can result in a denial on your loan request.
Types of land loans
Now that you’re ready to get a land loan, it’s time to consider the type of loan you need. By narrowing down the exact type of loan you need, you might find that a lender is more willing to finance your purchase.
When you’re looking to purchase land, you have three options: a raw land loan, an improved land loan and a construction loan.
Raw land loan
A raw land loan is designed for areas that don’t include sewage, electricity or other improvements. Because these loans are considered speculative, and therefore come with a higher potential for loss, they typically require a higher down payment than other land loans — as high as 50% of the land cost.
Most lenders will want to know exactly what you plan on using the land for and your potential timeline for accomplishing it. Raw land loans are generally the hardest to finance: Should you default, it can be difficult for a lender to break even if they need to sell your property.
Improved land loan
If you intend to build a primary or secondary residence on a piece of land but aren’t ready to start construction for a few years, an improved land loan might fit your needs.
To be eligible for an improved land loan, your piece of property should have street access, electricity, sewage and other improvements. A lender will want to know your timeline, and it’s a good idea to give reasons for why you need the land now but aren’t ready to build.
Construction loan
A construction loan is generally the easiest to finance among land loans. These loans are for buyers who’ve found a piece of land and are ready to build. Because you’re investing in the property and transforming it with a structure, you’re considered less likely to default on your payments — meaning the less money you’ll have to pay up front.
Once you’ve constructed a building on your property, you can often meet with your lender to convert your construction loan into a traditional mortgage.
Where can I get a personal loan to buy land?
This isn’t an exhaustive list, but it should give you a place to start when you’re looking for a lender.
Credit union loans. A credit union loan is a suitable option because the banker likely knows the area. They’re more likely to work with you when your plan involves developing your land or building a house.
Home equity loans. If you own a home and have already built up equity, consider tapping into your equity to make a down payment on your land loan. Lenders like to see that you have additional collateral, assuming that with it, you’re less likely to default on your loan.
Owner financing. This is a seller-to-buyer option through which you agree to pay the person selling the land in installments, rather than go through a secondary lender. Because you’re setting up a promissory note containing the various elements of a purchase — interest rate, repayments, what happens in a default — consider legal counsel when pursuing this type of loan. And keep in mind, bank loans are usually insured FDIC up to $250,000, while purchases between private citizens won’t be.
Farm loans. If you plan on starting a farm, a loan through the USDA Farm Service Agency may be an option. The FSA is helpful for people who may not have the best credit but do have a history in agriculture.
Which lenders are best to finance a land purchase?
Not all lenders are willing to finance a land loan, so research potential lenders before you attempt to apply. Consider starting your research with local credit unions — these institutions could know your local area better than national banks, and might be more willing to assess the benefits of your land purchase. You can also try local banks or national banks.
If all else fails, speak to the land owner directly. You may be able to purchase the land directly from the seller in installment payments, rather than having to pay for it in one lump sum. We discuss this type of lending situation called owner financing above.
4 steps to take before getting a personal loan for land
Unlike a mortgage, getting a land loan nearly entirely depends on the piece of property you intend to purchase.
To convince a lender that you’re won’t default and a have plan in hand, take a few important steps before contacting potential lenders.
1. Know what land you’d like to buy. Before you contact a lender, have a lot in mind. A lender wants to know what you’ll be doing with the land, and going to a lender without knowing the land itself can result in a rejection.
2. Know the zoning regulations, easements and improvements.City and county zoning laws play a big part in what you can and can’t do with your land. For instance, you might not be able to legally start a farm if the area is zoned residential.
Similarly, easements — or the right for you to use someone else’s land — and planned improvements for sewage, electricity and other utilities could prevent you from doing what you’d like once you buy the property. If you’re looking to build a house but a local cattle farmer has rights to use a portion of your land to graze, you’ll have to settle the issue legally before you can build.
3. Contact the seller to make an offer. Once you’ve done your research and are ready to buy, contact the seller either yourself or through a lawyer. Prepare to ask for an exclusive buying period while you pursue financing — otherwise, the owner could sell the land before you’re approved for a loan.
4. Develop a plan for the property. Prepare a substantial plan for your property, including your estimates of costs and timeline for building on the land. Be specific for your needs — for example, when planning a farm, include costs for purchasing livestock, seed and farm equipment. Your job is to convince the lender you won’t default, and showing them your ideas, associated costs and estimated timing attached is a solid way to help secure your financing.
Cautions to consider when financing a land purchase
It can be difficult to get financing. Because land is hard to sell if you default on your loan, lenders are often less likely to finance your purchase without proof of a solid plan.
A high down payment may be required. Land loans — especially raw land loans, where the land is not already improved — can require high down payments. Be prepared to put down 30% to 50% of your land cost when you get a loan.
Good credit is required. Because a lender is likely taking a big risk to help you buy your land, you’ll need good to excellent credit for most land purchases. Lenders want to be sure you’re able to handle your money and make timely payments before they commit.
You’ll need to know the area. If you don’t know the area, easements, property values and geographic concerns like flooding or tornadoes, you might not be prepared for potential damage to your property. Do your research before you start the buying process so that you don’t face an expensive surprise in the future.
Tips for purchasing land
You have two main factors to consider when purchasing land:
When to purchase. There’s no best season to purchase property, but many people take their land off the market during autumn or winter, which could result in fewer properties available for purchase. For the most options and possibly lower prices, compare values across all seasons to see how they fluctuate in your local market.
What to purchase. When narrowing down the type of land you want to purchase, you’ll need to nail down what you plan on using it for. If you plan on building a house, it’s better to find property with improvements rather than raw land to avoid incurring the extra costs of installing utilities.
Bottom line
If you’re considering buying a piece of property, you could face more steps than you might have expected. The good news: The best land purchase can be an asset to your financial portfolio. And if you go to a lender knowing exactly what you need, you’ll have a better chance of qualifying for a loan.
Kellye Guinan is a freelance editor and writer, specializing in consumer lending. Her writing and analysis has been featured on Bankrate, MSN and MediaFeed. She holds degrees in anthropology and German language and literature from Middle Tennessee State University.
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