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7 min read May 15, 2023

What is a Land Loan and How Do They Work?

A land loan is a type of financing used to purchase a piece of land. Land loans are different from traditional home loans because the lender views the land as more risky than a home, and the loan terms and requirements are often stricter.

Land loans can be used to purchase vacant land for building a home, commercial property, or agricultural land for farming.

What is a Land Loan?

A land loan is a type of financing used to purchase undeveloped land or land with minimal improvements. Unlike a mortgage, which is used to purchase a property with a home or building already constructed, a land loan is used to purchase land without any existing structures.

Land loans can be used for a variety of purposes, such as building a new home, constructing a commercial building, or purchasing land for investment purposes.

Types of Land Loans

There are different types of land loans available to borrowers depending on their specific needs and the intended use of the land. Here are some common types of land loans:

  • Raw Land Loans: These loans are used to purchase undeveloped land without any improvements or infrastructure. Raw land loans typically have higher interest rates and require a larger down payment.
  • Lot Loans: These loans are used to purchase a lot or land that is intended for residential development. Lot loans often have lower interest rates than raw land loans, but still require a substantial down payment.
  • Agricultural Land Loans: These loans are used to purchase land that will be used for farming or ranching. Agricultural land loans may have lower interest rates and longer repayment terms than other types of land loans.
  • Development Loans: These loans are used to finance the development of land into residential or commercial properties. Development loans typically have higher loan amounts and longer repayment terms than other types of land loans.
  • Construction Loans: These loans are used to finance the construction of a new home or building on the land. Construction loans may be combined with a land loan, and typically have a shorter repayment term than other types of land loans.

How do Land Loans Work?

Land loans work similarly to other types of loans. The borrower applies for a loan from a lender, and the lender evaluates the borrower’s creditworthiness, income, and other financial factors to determine if the borrower is eligible for the loan.

If approved, the lender will provide the borrower with funds to purchase the land. The borrower will then make payments on the loan according to the agreed-upon terms, which typically include an interest rate and a repayment schedule.

It’s important to note that land loans often come with higher interest rates than traditional home loans, as they are considered higher risk by lenders. Additionally, land loans may require a larger down payment, as lenders typically require a higher amount of collateral for land loans compared to home loans.

Pros and Cons of Land and Lot Loans

Here are some potential pros and cons of land and lot loans:


  • Flexibility: Land loans can be used to purchase various types of land, from undeveloped plots to agricultural or commercial land.
  • Investment potential: Owning land can have investment potential, as the property may appreciate over time or be developed for future use.
  • Lower down payment: Some land loans may require a lower down payment than traditional mortgage loans.
  • Build on your own terms: If you are purchasing land to build a home, a land loan allows you to choose your own builder and design the home to your specifications.


  • Higher interest rates: Land loans may come with higher interest rates than traditional mortgage loans due to the increased risk associated with land as collateral.
  • Shorter repayment terms: Land loans may have shorter repayment terms, which can result in higher monthly payments.
  • Difficulty in obtaining financing: Lenders may view land loans as high-risk investments, which can make it challenging to obtain financing.
  • No income generated: Unless the land is used for agricultural or commercial purposes, it generally does not generate any income.

How To Get a Land Loan

Here are the general steps to get a land loan:

  • Determine the type of land loan you need: Before applying for a land loan, you should determine the type of land loan you need. There are different types of land loans available, such as raw land loans, lot loans, and construction loans. Each type has different requirements and qualifications.
  • Check your credit score: A good credit score is important to qualify for a land loan. You should check your credit score before applying for a loan. Generally, lenders require a credit score of at least 680 for land loans.
  • Gather necessary documents: You will need to provide financial and legal documents to apply for a land loan. These may include tax returns, income statements, bank statements, proof of employment, and property documents.
  • Research and compare lenders: Different lenders offer different interest rates, fees, and loan terms. You should research and compare lenders to find the best loan option for your needs.
  • Apply for the loan: Once you have selected a lender, you can apply for the loan. The lender will review your application and may ask for additional documentation or information.
  • Complete the loan process: If your loan application is approved, you will need to sign the loan agreement and complete the loan process, which may include an appraisal of the property and a title search.
  • Receive the funds: After the loan process is complete, the lender will disburse the funds to you or to the seller of the property, depending on the loan terms.

Other Land Purchasing Options

If obtaining a land loan is not feasible or desirable, there are other options available for purchasing land:

  • Cash Purchase: If you have enough cash available, you can purchase the land outright without the need for a loan. This option can be ideal if you have been saving up for a while and want to avoid taking on debt.
  • Owner Financing: Some landowners may be willing to offer financing directly to the buyer, allowing them to make payments over time rather than obtaining a loan from a bank. This can be a good option for those who have difficulty qualifying for a traditional loan or who prefer to work directly with the seller.
  • Home Equity Loan: If you own a home and have built up equity, you may be able to use a home equity loan to purchase land. This option can be easier to qualify for than a traditional land loan, but keep in mind that your home will be used as collateral for the loan.
  • Government Programs: There are various government programs available to assist with land purchases, such as the USDA’s Farm Service Agency loans and the Bureau of Land Management’s land sale programs. These programs often have specific eligibility requirements and restrictions, so be sure to research them thoroughly before applying.

Overall, it’s important to consider all your options and carefully evaluate the pros and cons before deciding how to finance your land purchase.


Land loans are a financing option for individuals looking to purchase land or a lot for various purposes, such as building a home, farming, or development. While there are different types of land loans available, they generally require a larger down payment, have higher interest rates, and may come with stricter lending requirements compared to traditional home mortgages.

It’s essential to consider the pros and cons of land loans and explore other financing options before making a decision. With careful research and planning, obtaining a land loan can be a viable way to achieve your goals of land ownership.


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