What Type of Loan Is Needed to Purchase Land?

Purchasing a tract of land can challenging.

Purchasing a tract of land can challenging.

Part of the frontier spirit of America is the desire to own land. However, the process of purchasing land has changed since the pioneer days. Land loans are less common now than they were in previous eras, and the marketplace for land loans is less competitive. But there are still a variety of options to choose from when looking to finance a piece of land.

General Information

Land loans are much like home mortgages for houses. However, there are fewer lenders willing to finance a tract of land. That's because, unlike a house, a piece of land might not be put to immediate use. This makes it is easier for the customer to simply walk away from the land, according to Bankrate.com. Because the bank takes on more risk, land loans almost always require more stringent underwriting criteria, such as the applicant's income and the amount of the down payment.

Raw Land

Most lenders will decide on whether to finance a piece of land based on the type of land. For example, "raw" land exists in its natural state without any man-made improvements such as sewer hookups, water connections or access to roads. Theses types of tracts are the hardest to obtain financing for. In most cases, lenders want to see a down payment of at least 30 percent for raw land and perhaps as much as 50 percent.

Improved Land

Improved land, or land that has features such as water, sewer and road access, will be easier to get financing for. This type of land is usually already zoned for residential, commercial or other use, meaning the purpose of the land is predetermined. Lenders are more willing to offer favorable loan terms, such as lower down payments and lower interest rates, on improved land because it is more likely to be used for a business or home in the near future.

Other Options

In some cases, the seller will provide the financing for the land loan. It is also possible to avoid financing altogether and obtain an equity loan or second mortgage on your home to provide you with the cash to purchase a tract of land outright. If you do need to finance your purchase, look for a local financing source. First, this may be your only financing option. And second, if you have an established relationship with a local bank or credit union, you are more likely to get a land loan.

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