- Land loans work in a similar way to traditional home loans
- Key differences are that they are harder to qualify for because of credit restrictions
- You’ll need a larger down payment than you would with a home
- Finding a bank might be easiest locally with a credit union
Buying vacant land has its own unique banking process. So what do you have to do to prepare yourself for buying vacant land with a bank loan?
To start, you’ll want to find a bank that does the type of land loan you need. Next, you’ll need to reach out to a bank and apply online or in person for a loan. From there, you’ll likely go through multiple income verifications. Finally, the bank will want to know quite a bit about the land.
We’ll explain the process of getting a loan from your bank. The bank will want to know a lot about the land - which is normal because it is their money being invested up front. This is also a good time for you to learn even more about your vacant lot. We’ll also go over some of the things you can do to more easily qualify for a vacant land loan.
Table of Contents
Getting started - find a bank
Finding a bank that will give a vacant land loan can be challenging though definitely not impossible. We would stay away from larger national banks and focus on local banks, like credit unions. They tend the know the area better and are more likely to give you consideration for what looks like a high risk loan to a bigger bank. Our first suggestion is to shop around different banks for the right terms, like APR and loan length, that best fit what you’d like.
Prepare to be turned away or referred elsewhere. Not every bank does land loans, and most don’t advertise that they do. These kinds of banks might also prefer you walk in for a face to face meeting to complete an application.
Giving info about vacant land to a bank
The bank is going to want much of the same data you already want to know about your vacant land. Just like you, they are using some information about the land to determine whether or not they want to invest in it, as well as how much interest to ask for, and of course, for paperwork.
They’ll want to know at least the following:
- Zoning restrictions: what can the property legally be used for
- Land use restrictions: Slightly different from zoning, this focuses more on environmental and local considerations for potential conservation and use
- Surveyed boundaries: where are the actual limits of the property?
- Utility access: Does the land already have running water, electricity, gas, cable, etc, and how much would it cost to add?
All of these things can be collected by you or a realtor from the city, a utility company, and potentially a surveyor.
Credit: Vacant Land and your credit score
As far as the bank process goes, the bank will of course check your credit score. Qualifying for a land loan requires a higher credit score than most other kinds of loans because the bank doesn’t want undeveloped land in its portfolio, and you need a high level of trust from the bank to ensure that they get payments - not land.
You’ll want at least a 720 credit score to have the best chance at qualifying for a loan and getting good terms. In order to achieve a credit score high enough to qualify, you have to do a few basic things right for a few years:
- Pay loan and credit card payments on time, which is the most important
- Have a fairly low (often less than 30%) utilization score with credit cards and other revolving accounts
- Be free of debt collections
You can make the process go faster by having tax statements as well as potentially paystubs prepared in advance. Do know that if your credit score is too low, that could take months to years to fix, even with good habits.
Down Payment for a land loan
For a land loan, this is often the biggest, hardest part of securing a loan because it can involve lots of money. A land loan tends to require a larger down payment than a home loan. A home loan down payment typically ranges from 3.5% to 20% - a land down can by anywhere from 30% to 50%. The upside to this? Unless you are buying a large territory or beachfront property, the price of a plot of land may be significantly cheaper than a home, making the down payment a bit more attainable.
Appraisal on vacant land
The bank will require an appraisal on your vacant land to learn how much a local assessor thinks your land is worth, regardless of your offer placed on it. This is to say that the bank typically won’t give you a loan worth more than the land itself. The bank’s ideal scenario is one in which the land appraises for more than you’ve offered, so if your loan doesn’t work out, they’ve gained value.
The appraisal involves a person coming to the land and looking at various details, then comparing those details to other properties that recently sold. This process is very hands off for you, and just results in papers indicating the value of the land, according to a third party associated with the bank.
Signing the loan
A typical home or land ownership contract signing takes place at the office of a closing company. You’ll sign paperwork both the agreements to transfer land into your name, and sign the documents that initiate the mortgage. For people who don’t sign contracts on a regular basis, this might feel like an extraordinary number of signatures and initials than you are used to.
What are typical loan terms for a vacant lot?
The average land loan is a lot shorter than a mortgage. While a mortgage for a home usually has 15 or 30-year options, you might get 2 to 5 years from a land loan, including a balloon payment.
Interests will vary based on numbers set by the Federal Reserve, but you’ll typically see 4% above prime.
In case you are wondering what a balloon payment is, you’ll want to read this carefully just so you understand: Land loan payments are fairly low to start with, but end in what is called a balloon payment. A balloon payment represents what is often the last or second to last payment, and it is often considerably larger than other payments the land owner has made. The bank does this in part to give landowners the opportunity to start making money with their land with a lower payment up front.
Balloon payments can be hard on some, because if you fail to make the balloon payment, you’ll be negotiating with the bank to keep your land, and you might be charged more interest and penalties. Just know that generally speaking, the bank wants the money from the loan and they have no solid interest in owning real land.
Be careful with a balloon payment and start saving up. The balloon payment often is the last payment you make before owning your land!
About THE AUTHOR
Brittany has been in the land business since 2020 when the world was starting to shut down. Since then, we’ve sold to dozens of people from ATV weekend warriors to camping enthusiasts to retired truck drivers. Our inventory spans mostly in the western United States. We’ve been trained by experience, land acquisition courses, and hundreds of hours meeting with county assessors and clerks, zoning officials, realtors, and land investors. We’ve answered hundreds of questions from people regarding the buying and use of land.Read More About Brittany Melling