A land loan can help you buy the lot you need to build your dream home. Here’s how they work

  • You can get a loan for raw, unimproved, or improved land purchases.
  • Land loans tend to have shorter terms and higher interest rates than home loans.
  • The right lender can be hard to come by for this relatively niche loan product.

If you want to build a home from the ground up, start a new business location, or tackle a new farming venture, you’ll need a plot of land. Whether you want to build soon or in the distant future, a land mortgage provides an opportunity to finance your land purchase. 

Typically, land loans are a bit more difficult to obtain than a regular home mortgage.

What is a land loan? 

At its most basic level, a land loan is a loan used to purchase a piece of land. However, not all land loans are created equal. There are three different land loan types — raw, unimproved, and improved —  that come into play. 

A raw land loan “applies to the purchase of completely undeveloped land — no roads, sewers, or electricity,” says Paul Sundin, a certified public accountant and CEO of Emparion, a provider of strategic retirement services. “When starting with raw land, you’ll have the most work ahead of you to build a home on the lot.” 

Another common type of land loan is for unimproved land. “Unlike raw land, this type of property has some utilities and amenities,” Sundin explains.

Finally, you can use an improved land loan to finance the purchase of property that already has access to electricity, water, and roads. Of all three options, this one offers the most streamlined path for building a home, Sundin says. 

How do land loans work? 

In many ways, a land loan is similar to a traditional mortgage. However, there are some important differences.

Down payment requirements for land loans typically ranges from 20% to 50%. You can get a conventional home mortgage with as little as 3% downs.

When you apply, the lender will evaluate your credit score and finances as a part of the loan decision. As with a home loan, you’ll need to provide extensive documentation of your finances including bank statements and pay stubs. Additionally, “you need to have a detailed building plan to show lenders and assure them that you can complete your building project,” says Jeffery Zhou, co-founder and CEO of FigLoans.

The amount of time a land loan will also probably be much less than you would have to pay off a mortgage, which is typically 30 years.

“Most land loans are shorter in term,” says Will Curtis, a certified commercial investment member (CCIM) at Crossed Sabers Commercial Real Estate. “Three to 5 years is not unheard of.”

Some land loans are structured with balloon payments at the end of the term to finish paying them off.

In addition to shorter terms, you’ll likely face higher interest rates. 

“Land loans are a more specialized product and not every bank will do them or will have the same level of comfortability in doing them, which means you could be charged a higher down payment or a high interest rate given the perceived higher risk,” Curtis says.

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Types of land loans

Every buyer has different needs when it comes to land loans. Luckily, there is a wide range of land loan options, which means you can find the perfect fit. Here are some of the most common land loan types:

  • Bank or credit union loans: Local banks and credit unions sometimes offer land loans where national banks do not. 
  • USDA loans: Low to moderate-income households purchase Section 524 USA loans to pursue their goal of homeownership. 
  • Borrow against your home’s equity: Do you have substantial equity built in your current property? A home equity loan allows you to tap into that value, which can be spent on a land purchase. But keep in mind that this option puts your primary residence at risk. 
  • SBA 504 loans: Business owners that want to use a piece of land for their business could qualify for a US Small Business Administration loan. The SBA and lender each put up a portion of the loan, and you’ll need to make a down payment of at least 10%.  
  • Owner financing: The entity selling the land may provide owner financing. In this situation, you would make agreed-upon payments to the seller over time. Sometimes this is referred to as seller financing. 
  • FSA Direct Farm Ownership loans: If you are looking to finance farmland as an addition to your existing ranch or farm, the Farm Service Agency offers 100% financing on certain land types. 

Finding the right land loan takes a lot of legwork. It’s important not only to determine the best type for the project you’re considering, but also the right lender to work with.

“Do your research on which lenders in your area finance land purchases,” Sundin says. “Compare the terms of each lender’s offer and make sure to get them on paper.”

Curtis stresses the importance of fully understanding the local market before selecting a land loan provider.

“When choosing a land loan, I generally advise my clients to look at who is doing a lot of land loans in the area they are purchasing,” he says.

Land loans pros and cons

A land loan can be very useful for the right buyer. But they aren’t for everyone. Here are some of the pros and cons to keep in mind when considering this financing option:



  • They provide an opportunity to finance a land purchase to build your own home.
  • Some government programs may allow for low down payments or even 100% financing.
  • They can be used to buy and hold land to build on when you’re ready. 
  • Interest rates are usually higher than for home loans.
  • It can be difficult to find lenders that provide land loans.
  • Repayment terms are usually much shorter than home loans.

Land loan example

Let’s say you’ve found a perfect residential lot. Based on the condition of the land, it qualifies as an improved land purchase. 

You don’t want to miss the chance to purchase the lot, but aren’t quite ready to build yet. So, you head down to the local credit union to ask about a land loan for the lot. Luckily, the community credit union does offer land loans for improved lots. 

The credit union takes a close look at the property and your credit before agreeing to finance your purchase. After putting down 20%, you can start making montly payments for five years while waiting to build on the lot.

The bottom line

Land loans can be a good way to help to help you finance construction of a new home or business venture. But they’re more complicated than a mortgage. And it’s important to fully understand what you’re getting into and how much it’s all going to cost in the end.

Zhou points out that while raw land is the cheapest type to buy, and you may save thousands of dollars buying some, building and installing the infrastructure to provide every ting from road access to water and electricity is likely to end up costing you even more.

Even if your lender doesn’t require a detailed plan for how you intend to use the land, be sure to map out the expenses involved in making your vision into a reality.