What Is a Land Loan?

How do land loans work?

Land loans allow you to finance the purchase of land on which you plan to build in the future, rather than buying an existing home. Because undeveloped land has less inherent value, lenders consider these loans riskier than traditional mortgages.

As a result, land loans usually come with higher interest rates, larger down payment requirements, and shorter repayment terms. Borrowers generally need strong credit, a low debt-to-income ratio and a clear plan for how they will use the property.

Land loans vs. construction loans

Land loans are often confused with construction loans, which are a similar financing option. Land loans are for borrowers who may plan to build in the future, but not right away.

Construction loans are for individuals who plan to purchase a plot of land and begin building on it immediately. Like land loans, construction loans are also short-term; however, they are often converted into a traditional mortgage after the home is built and the loan term has ended.

Land loans vs. mortgages

There are several big differences between land loans and traditional mortgages.

Land loans are much more stringent and expensive than traditional mortgages, and you’ll need to know what you want to do with the land.

• Average term length: While most conventional mortgages have 30-year repayment terms, land loans are usually much shorter; some may have terms as little as two years.
• Payment schedule: Most land loans require a balloon payment at the end of the loan term, which is a large lump-sum payment used to pay off the remaining balance. In contrast, traditional mortgages typically have equal, fixed payments over the life of the loan.
• Availability: Land loans are not as widely available as traditional mortgage loans and may be more difficult to find. In general, they are riskier for lenders to offer because there’s often less collateral value in land than there is in property with a home on it.
• Interest rate: Land loans typically have higher interest rates that can be almost double those of traditional mortgages, depending on the market.
• Down payment: Lenders have more stringent requirements for land loans than traditional home loans. For example, some conventional mortgages may allow a down payment as small as 3%, while the minimum down payment on land loans is typically in the 25% range.

The high down payments can be a deterrent for some borrowers. One Virginia resident told us they opted to refinance their home instead. “We looked at going and getting a land loan, and we found out that it was going to cost us a fortune because you had to put so much money down,” they said. “You had to put down like 25% in order to get a land loan, and we didn’t want to do that.”

» MORE: How to buy land

Types of land loans

There are three main types of land loans: raw, unimproved and improved. Which one is right for you will depend on the type of land you plan to purchase.

Raw land loans

Raw land loans are used to purchase properties that have not been developed at all. These properties generally don’t have any access to utility services such as electricity.

You may decide to purchase raw land with the intention of building your dream home later. But to secure the loan now, you’ll need to present a fairly detailed plan to the lender explaining how you will develop the property.

This plan may include architectural drawings for the home and a project timeline for the building process. Essentially, the lender needs to see that you’ve done your homework, learned what building a home entails and evaluated its costs.

To be eligible for a loan on raw land, you’ll generally need to offer at least a 35% down payment, which means your LTV (loan-to-value) ratio should not exceed 65%. The Federal Deposit Insurance Corporation (FDIC) sets LTV ratio limits for most lenders.

Unimproved land loans

You can use an unimproved land loan to purchase real estate that is more developed than raw land but not entirely connected to the grid. These properties may already have some utility hookups but lack other essential items (such as electric meters). Loans for unimproved land are slightly easier to obtain than loans for raw land, mainly because unimproved properties are more primed for building.

To qualify for this type of land loan, you’ll usually need to offer at least a 25% down payment.

Improved land loans

Improved land, also known as a “lot,” already has full access to utility services and roads. These land loans are easier to obtain than raw and unimproved land loans because the land is more developed; however, they also tend to have a higher purchase price than the other two alternatives.

Loans for improved land have less stringent requirements than raw or unimproved land loans. You’ll need to offer at least a 15% down payment, but interest rates are typically lower on this type of land loan than on the others.

Land loan requirements

As demonstrated above, the specific requirements for land loan approval partially depend on the type of land loan you’re pursuing. But in general, here are some things you may need:

• A plan for developing the property
• A credit score at least in the 600s
• A down payment of at least 15% or 20% for improved land, or as high as 50% for raw land
• The ability to pay off the loan on a short timetable, depending on the loan terms

There are multiple ways to purchase land, however. The following sections explore options for government-backed land loans, and alternative ways to pay for land if one of these isn’t right for you.

Government-backed land loan programs

Government-backed land loans can make buying land more affordable by offering lower interest rates, flexible terms and, in some cases, no down payment requirements. These programs aren’t available to everyone, but if you meet the eligibility requirements, they can be a helpful alternative to other financing types.

USDA land loans

Low-to-moderate income borrowers can use USDA loans to purchase land and build a home, but the property must be located in a rural area. Combination Construction-to-Permanent (Single Close) loans even let you finance your land purchase and your home’s construction with just one closing process.

To qualify, you’ll need a low enough income for your area and a debt-to-income ratio of no greater than 41%. There are no down payment requirements, but there are some limitations to how you can use the funds. For example, you must use a USDA-approved contractor to build the home.

SBA loans

Small Business Administration (SBA) loans can help borrowers purchase land for commercial or business purposes, including building facilities or expanding operations. These loans typically require a solid business plan, strong credit and collateral, and they often cover both land acquisition and construction costs.

While the process can be more complex than a standard mortgage, SBA loans offer competitive rates and longer repayment terms, making them a viable option for entrepreneurs looking to secure land for business use.

State and local programs

Many states and municipalities offer land loan or grant programs to encourage development, agriculture or homebuilding in targeted areas. These programs often provide lower down payments and more favorable repayment terms, including lower interest rates.

Information on these programs is usually available through state housing finance agencies, local economic development offices or municipal planning departments, making them worth exploring for prospective land buyers.

Alternative ways to finance land purchases

If you don’t qualify for a government-backed land loan, you can explore private loans and seller-financed options. Here are some alternative options for financing your land purchase.

Loans from local lenders

Since many national lenders don’t offer land loans, you may want to look at smaller, community-based financial institutions.

Local credit unions with an established presence in the area are more likely to offer these types of loans. You may also research financial institutions that are part of the Farm Credit System; these lenders tend to specialize in land and construction loans.

Each lender has different loan requirements, so you’ll need to know the type of land you want to purchase and what you’ll use it for. For example, some lenders require plans to build a home on the property in the near future. There may also be acreage limitations.

Seller financing

Through seller financing, you and the seller may be able to work out a repayment agreement without the involvement of a third-party lender. You’ll sign a legal document called a land contract, which details the terms of the agreement.

The loan term is generally short, and you’ll probably pay a higher interest rate than you would if you received the loan from a bank. This type of financing also usually requires a balloon payment at the end of the loan term.

This may be a good option for borrowers who don’t qualify for other land loans. You should consult with a real estate attorney to ensure that your stake in the property is protected with the land contract, though.

Home equity loans

A home equity loan uses the equity you’ve built in your current home to finance a large purchase, such as land. Because your home is used as collateral, it may be easier to obtain this type of financing than if you specifically applied for a land loan. However, you could lose your home if you stop making payments.

There are no down payment requirements with a home equity loan, and you can repay the loan in fixed, equal monthly payments. Interest rates are usually lower as well. The repayment terms are also longer; home equity terms are usually between five and 30 years, while some land loans can be under five years.

This could be a good option for homeowners with long payment histories, but remember that it can be risky to use your home as collateral on a second mortgage.

How to buy land and finance your dream home

Buying land and building your dream home is a bigger undertaking than purchasing an existing house. The choices you make early on about location, timing and land type can have a major impact on the cost of your project as well as your loan options.

1. Decide when and where you want to build

Before exploring your loan options, define the type of land you want and when you plan to build. Lenders may prefer borrowers who plan to start construction soon after purchase, and improved land with access to utilities and roads is usually easier to finance than raw land.

Checking local zoning laws and building codes early in the process can also save time and prevent costly surprises later.

2. Understand the costs

If you plan to build your dream home, make sure that you’re aware of the potential costs first.

According to a survey by the National Association of Home Builders, the average homeowner spent $162 per square foot on the construction of a single-family home in 2024, and the average total sale price for a newly built home (including land) was $665,298. Total construction costs made up 64.4% of that figure ($428,215).

NAHB noted that these were the highest prices in the survey’s history, which the organization has conducted since 1998. Materials and labor costs can vary based on many factors, so you’ll want to investigate them with a local builder.

3. Choose your land

Next, you’ll need to decide the type of land on which you want to build. Some homeowners choose to buy in areas where a developer has already purchased. In those cases, you’ll usually work with a specific builder who may already have a small selection of plans to choose from.

When looking at land options, remember that fully developed land is usually easier to get a loan for than raw land.

In some cases, the home plan may be set, but you’ll be able to design the home's interior to your preferences, such as selecting finishes for the cabinets.

Another option is to build a custom home, which is when you purchase the property and hire a builder. Keep in mind that improved land with access to utilities and roads is easier to get a loan for than raw land.

4. Secure financing

Once you know the type of land you want to buy and build on, you can shop around for financing. The type of land you want to buy (raw, unimproved or improved) and how you plan to use the property (building a house now or later) will affect your lending options.

» MORE: Buy, build or fix: What’s best for first-time homebuyers?

Pros and cons of land loans

A land loan might be a good option if you find a desirable spot, and you have plans for the property and the ability to make a large down payment. But it’s not the best fit for everyone. Carefully consider the pros and cons of applying for a land loan, and weigh these against your other options.

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