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Purchasing vacant land can be an exciting prospect, but will often require a land loan. Land loans are a financing option used to buy a plot of land and, like a mortgage, can be obtained through a bank or a lender, who will evaluate your credit history and the land value to determine if you're an eligible buyer.
However, land loans are risky for lenders, since there is no home to act as collateral. That's why it's important to be prepared for a higher down payment and interest rate to secure a loan to buy land.
How to get a land loan
The process of getting a land loan is similar to that of getting a traditional mortgage. As discussed later, the different types of land loans have varying qualifications, though you'll generally need excellent credit, an acceptable debt-to-income (DTI) ratio of roughly 30% to 40% and consistent income.
The reason for the strict qualifications? Compared to constructed property, land tends to be a riskier investment. Land loans are often short-term, two- to five-year loans followed by a balloon payment , compared to the typical 15- and 30-year terms offered on a home mortgage . There are longer terms available in special cases, particularly if you are going to use the land to build a home.
Different types of land loans
Depending on where you buy land and for what purpose, the process and options for getting a loan could vary. Below we explain the common land loan types and how to buy land.
Raw land loan
Raw land is land that isn't cultivated and has no improvements, such as a home or other constructed elements. Buying raw land is often appealing since it's cheap land and provides the flexibility to do what you'd like with it in accordance with local laws. On the other hand, raw land can be risky for lenders since it will likely take longer to develop.