- To start the financing process for vacant land, identify the land type, understand the financial requirements, and choose the financing option.
- Buyers can finance vacant land with a land loan, seller lending, home equity loan, SBA 504 loan, USDA loan, or a third-party broker.
- Financial lending criteria are stricter for vacant land, including a minimum credit score of 700-720 and a DTI ratio of 30-40%.
Buying vacant land is a savvy investment idea, but few know how to finance it, so they shy away from the more complicated and strict process.
To finance vacant land, identify the land type, understand the financial requirements, and choose the financing option. The six best ways to finance vacant land include a land loan, seller lending, home equity loan, SBA 504 loan, USDA loan, or working directly with a third-party broker.
Vacant land is a great investment opportunity, but we should consider a few things before investing or buying. Because of past experiences, we understand the proper methods to finance vacant land. Below, we explain exactly how to do it for potential buyers based on land type, financial profile, etc.
Table of Contents
How To Finance Vacant Land
Buying vacant land is a costly endeavor, depending on the lot size and reason for the purchase. It’s not as easy to finance a lot of vacant land, but luckily we can help.
First, we recommend identifying the land type. This will allow the buyer to weigh their options and ensure they can be used for their needs.
Next, identify the land type. This is crucial because vacant land qualifies for different lending and financing options depending on the type of land loan required.
Lastly, the decision can be made when all the information has been gathered. The best financing option should make monthly payments affordable while avoiding high interest and getting approved quickly.
Identify The Land Type
To get financing to buy vacant land, many people will need to speak with a real estate agent. But only some know how to find one or what the process is like.
We recommend visiting properties with an agent because they can help explain what type of land it is. For example, raw, unimproved, and improved land are similar but have much different financing requirements.
Understand The Financial Requirements
Next, understand the financial requirements of the vacant land. This includes price, down payment required, etc., and all of these need to be considered.
The price of the vacant land is important; typically, the budget gets set before even looking to determine what’s realistic to make an offer. The buyer’s credit score, land type, and loan requirements will determine the required down payment.
Choose Your Financing Option
Lastly, we know everything about our finances and the requirements to purchase a piece of vacant land so we can decide on the financing option.
This includes a land loan, seller lending, home equity loan, SBA 504 loan, USDA loan, or working directly with a third-party broker.
6 Best Ways To Finance Vacant Land
Vacant land is a valuable asset and a major source of revenue. It can be used for farming, construction, and other purposes like building new homes.
But because vacant land has less immediate use and is considered a riskier asset, getting funding is more complex than a traditional home loan would be.
However, there are still plenty of ways to finance vacant land, and below we have listed the six best ways to do so.
1. Land Loan
The primary option to consider is a land loan. These vary based on the land type, with options like raw, unimproved, and improved land loans with different financial requirements and interest rates.
These are riskier loan types compared to a normal mortgage, so expect stricter credit scores and DTI ratios when talking to banks and lenders.
2. Seller Funding
Seller financing is another option, but only some landowners will offer this to buyers. We prefer this method because rates tend to be lower, and there is no need to involve a traditional lender during the process.
However, we need help finding this option available on larger land purchases.
3. Home Equity Loan
A home equity loan is another option to borrow money from a home's equity. This can be used to fund the purchase of vacant land, although it might only be an option for people with a mortgage right now.
We recommend this option to anybody purchasing lots of home equity built up already.
4. SBA 504 Loan
An SBA 504 Loan is another option to consider. This business loan is used for fixed assets, including real estate purchases like vacant land.
These loans typically have a term of 10, 20, or 25 years and only a 10% down payment, so they can be a stronger option for buyers with less upfront capital.
5. USDA Loan
USDA loans are unique, but they work best for vacant land. This is qualified as a zero down payment mortgage for rural homebuyers.
To qualify, the buyer must be a US citizen with dependable income and other similar requirements mentioned thus far. However, the land must be located in qualifying areas.
6. Work With A 3rd Party Broker
Lastly, smaller vacant land purchases can be funded through a third-party broker. One example is Rural Vacant Land, where they handle the costs up front with a small down payment and small monthly payments.
What Is The Financing Criteria for Buying Vacant Land?
The financing criteria for buying vacant land is a set of conditions that must be met to get funding for the property. These are much stricter criteria to meet compared to buying a home.
It requires a better credit score, a larger down payment, low debt, and proof of steady and reliable income for any financing approval.
Strong Credit Profile
A strong credit profile is required in many borrowing circumstances, but this is especially true when financing vacant land. Typically, most banks require a credit score of 700-720.
This is much higher than a typical home purchase. However, it’s still possible to find banks willing to lend to buyers with lower scores between 600-690 if they have strong income or a larger down payment.
Hefty Down Payment
A down payment is an important part of buying a vacant piece of land because it gives the buyer an idea of how much we are actually paying for the property when we buy it outright.
For vacant land, expect to pay a down payment between 15% and 35% of the purchase price. The exact number varies based on the land type and the financing choice.
For example, raw law loans require a minimum 35% down payment.
Low Debt To Income Ratio
Next, the financial profile must show a low debt-to-income ratio. This is either bolstered by high income or low debt levels.
This number should be no higher than 30-40%. Otherwise, it becomes difficult to get approved regardless of the credit score.
Proof Of Regular Income
Lastly, any potential buyer must display proof of regular income for financing approval. This also determines the total loan amount a person gets approved for to purchase vacant land.
Is There A Minimum Credit Score For Vacant Land Financing?
The answer is yes. State law requires lenders to verify a borrower's credit score before approving a loan for vacant land. A minimum credit score for vacant land financing is usually around 700-720.
A credit score is calculated using factors like payment history, debt-to-income ratio, and amount of available collateral. These are all important financing factors to get approved for land.
However, the minimum credit score for vacant land financing is not set in stone. It depends on the lending institution, the type of property, and the location.
What Is The Longest Loan Term For Vacant Land?
The longest loan term for vacant land is 30 years. The main reason for the longer loan term is that the bank needs to be confident that the property will not be sold during the entire period of the loan.
However, we’ve noticed it’s rare to find a 30-year loan term in most US states. Typically, the land is cheaper, so the loan terms are closer to 10-15 years.
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