Purchasing land can be a great step toward building a home, starting a business, or a long-term investment. However, many buyers are surprised to learn that financing for land and financing for a home work differently. One of the most common questions people ask during the process is, “Can I get a mortgage on land?”
The simple answer is that you usually can’t get a traditional mortgage for land alone, but you can finance it through a special type of loan known as a land loan. These loans allow buyers to purchase vacant land and pay over time, similar to a mortgage, but they often require more stringent requirements and a larger down payment.
This Redfin article explains how land financing works, compares land loans to home loans, and explains the important factors lenders consider when approving a land purchase.
Can I get a mortgage on land?
In most cases, lenders will not issue a conventional mortgage on land that does not yet have a home or building built on it. Mortgages are designed for developed real estate because homes provide immediate collateral value and are generally easier to sell if the borrower defaults.
Vacant land comes with more uncertainty. If the borrower stops making payments, the lender may have difficulty reselling the property quickly. Land values can also be highly dependent on future development, zoning changes, and infrastructure improvements. Because of these risks, lenders typically use a different type of loan when dealing with vacant land.
Buyers typically apply for a land loan or lot loan instead of a mortgage. These loans serve a similar purpose to mortgages, which is that you can borrow money to buy real estate, but the loan terms are usually more stringent.
What is the difference between a land loan and a home loan?
For anyone considering purchasing land, it is essential to understand the difference between a land loan and a home loan. Although both are real estate loans, they are designed for different types of real estate and involve different levels of risk for the lender.
Mortgages are used to purchase real estate that is already a habitable structure, such as a home, condominium, or apartment complex. Because the property is move-in ready and has an established market value, lenders consider the mortgage to be relatively low risk. As a result, home loans typically offer lower interest rates, longer repayment terms, and lower down payment requirements. Land loans, on the other hand, are used to finance vacant land that has not yet been erected. Lenders consider these loans to be riskier because the land may not generate income or be easily resold. That risk often results in higher interest rates and higher down payment requirements.
Another important difference is the repayment terms. Traditional mortgages typically last between 15 and 30 years, giving borrowers a long loan repayment period. Land loans often have short repayment terms, sometimes 10 to 15 years, and can have higher monthly payments.
The purpose of the purchase also plays an important role. Mortgage loans are typically issued against existing primary residences or investment properties, while land loans may require the borrower to describe development plans. Lenders may ask if the buyer plans to build a home right away or hold the land as a long-term investment.
Although mortgages have better terms overall, land loans are often the only option when purchasing vacant property.
Types of land loans
The type of land you purchase will greatly influence the financing options available to you. Lenders typically classify land into three main types: raw land, unimproved land, and improved land. Each category carries a different level of risk and impacts loan terms and approval requirements.
1. Raw land loan
Raw land refers to land that has not been developed or has infrastructure. These parcels are often located in rural or undeveloped areas and may not have access to basic services such as public services or paved roads. Because of these risks, lenders typically impose stricter financing requirements on raw land purchases. Borrowers often need to provide a larger down payment, a strong credit history, and a clear plan for how the land will be used.
Typical unpaved land loan terms include:
20% to 50% down payment Higher interest rates compared to home loans Loan term typically around 10 to 15 years
Lenders often ask about the buyer’s intentions for the property. Whether you plan to build a house, start a farming business, or hold land as an investment, explaining your plans will increase your chances of approval.
2. Unimproved land loans
Unimproved land falls between raw land and fully developed land. These lots typically have infrastructure nearby, but require additional work before construction can begin.
For example, undeveloped land may include basic road access but lack direct connections to public facilities. Electricity may be available nearby, but water, sewer, and septic systems may not yet be installed.
Because unimproved land already has some development potential, lenders generally consider it to be less risky than undeveloped land. As a result, financing terms may be slightly more favorable.
Typical unimproved land loan terms include:
Down payment is approximately 20% to 35% Interest rate is lower than a land loan but higher than a home loan Loan terms are moderate (varies by lender)
Lenders may want to understand how the property will ultimately be developed. Demonstrating that utilities can realistically be connected and that the land is suitable for construction will help strengthen your loan application.
3. Improving land loans
Improved land (often referred to as subdivision land or construction-ready land) is land that already has the necessary infrastructure for construction. These lots are typically located in residential developments or areas where utilities and roads are already in place.
Borrowers who purchase improved land may have lower down payments (often about 10% to 25%) and competitive interest rates compared to other land loans. Improved land loans are common in residential subdivisions, where developers sell individual lots to buyers on whom they plan to build homes.
Common improved land loan terms include:
Down payment is approximately 10% to 25% Low interest rate compared to other land loans Financing terms similar to traditional real estate financing
Improved land is ready to build on and therefore poses less risk to lenders than raw or unimproved land.
How to get a land loan
Financing vacant land can be a little more complicated than financing a home, as fewer financial institutions offer this type of loan. Buyers may need to consider multiple financing options to find a lender willing to finance their purchase. Knowing where to look will make the process much easier and increase your chances of securing a loan.
The most common ways to obtain land financing include:
Local banks and credit unions: Local financial institutions that understand local land values and development trends are often a good starting point. They may be more willing to lend to real estate in their area than large national banks. Agricultural lenders or agricultural credit institutions: These lenders specialize in financing farmland and rural assets. These can be a strong option for buyers purchasing land, farmland, and real estate outside major cities. Seller Financing: In some cases, the property owner may agree to finance the purchase directly. Instead of borrowing from a bank, the buyer makes monthly payments to the seller based on terms agreed upon by both parties. Developer or Home Builder: Developers may provide financing for subdivisions within new housing communities. These loans may be designed for buyers who plan to build a home within a certain period of time.
Land loans are more specialized than traditional home loans, so buyers may need to compare multiple lenders before finding the right option. Considering alternative financing options such as local banks, agricultural lenders, and seller financing can increase your chances of securing a loan for your land purchase.
Land loan requirements
Because vacant land is generally considered a riskier investment than developed property, lenders typically have more stringent requirements for land loan approval. Borrowers often require a stronger financial position and may need to provide more information about how the land will be used.
Before applying for a land loan, it helps to understand the factors that lenders typically evaluate during the approval process.
Some of the most important land loan requirements include:
Higher down payments: Land loans typically require higher down payments than traditional home loans. Depending on the type of land and the lender’s policies, buyers may be required to make a down payment of 20% to 50%. Credit score: Most lenders prefer borrowers with credit scores of 680 or higher. Stronger credit increases your chances of approval and may help you secure a better interest rate. Debt-to-income ratio (DTI): Lenders will review how much of your monthly income can go toward paying off your existing debts. A lower debt-to-income ratio usually indicates greater financial stability and increases the likelihood of loan approval. Land planning: Lenders will often ask how you plan to use the property. If you plan to build a home or develop land, you can strengthen your application by providing clear timelines, construction plans, and development goals.
Take a construction loan instead
For buyers looking to build a home in the near future, a construction-to-permanent loan may be a better option than a traditional land loan.
This type of loan combines the purchase of land and the construction of a home into one loan. During the construction phase, funds are gradually released to cover construction costs. Once the home is completed, the loan converts to a regular mortgage.
Construction loans often have lower interest rates than land loans because the completed property includes the home, which provides stronger collateral. Additionally, borrowers only need to complete one loan process instead of applying for separate loans for land and home.
However, construction loans typically require detailed building plans, a contract with a contractor, and a clear construction schedule before approval.
Advantages and disadvantages of land financing
Land financing brings real estate ownership closer to home, but it also comes with some considerations that buyers should carefully evaluate.
The main benefits of land financing include:
Lower upfront costs: Financing allows you to purchase land without paying the entire purchase price in cash. Opportunity to secure desirable real estate early: Buying land now allows you to own valuable real estate before prices rise or development occurs in the area. Potential for long-term appreciation in value: Land can increase in value over time, especially in areas with population growth or new infrastructure development. Flexibility to plan your future: Owning land gives you the freedom to build a custom home, start a business, or develop real estate on your own schedule. Investment potential: Some buyers purchase land as a long-term investment, planning to sell it later when demand increases.
Despite these benefits, land loans also have some challenges that buyers should consider.
Higher interest rates: Land loans often have higher interest rates than traditional mortgages because lenders consider vacant land to be a higher risk. Higher down payment requirements: Many lenders require a down payment of between 20% and 50% depending on the type of land you purchase. Limited lender options: Not all banks offer land loans, which can make financing more difficult. Shorter loan term: Land loans have shorter repayment terms and may have higher monthly payments than standard home loans. Development Uncertainties: Factors such as zoning, utilities, and infrastructure can affect the ease with which land can be used and resold.
Can I get a mortgage on land?
While you usually can’t get a traditional mortgage on vacant land, you do have financing options available through land loans and construction loans. These specialized loans allow buyers to purchase real estate while spreading their payments over time, but often require a larger down payment and stronger financial qualifications.
Whether you’re looking to build a home now or invest in land for the future, researching lenders and lining up your finances will greatly increase your chances of getting the right loan.
