With unfinished lots, lenders tend to keep loan terms shorter (five to ten years, for example)

Finished lots are less risky for lenders, so they’re more likely to offer single-step construction loans that convert to “permanent” (or 30-year) mortgages after completing construction.

Reducing Lender Risk

If you’re buying raw land, you’re not necessarily going to get a bad rate. You can improve your chances of getting a good deal if you help the lender manage risk. It may be possible to get longer-term loans, lower interest rates, and a smaller down payment requirement. Factors that help include:

• A high credit score (above 680) shows that you’ve successfully borrowed and repaid debts in the past.
• Low debt-to-income ratios indicate that you have sufficient income to make required payments.
• A small loan amount results in lower payments and a property that is most likely easier to sell.

No Plans to Develop

If you’re going to buy land without plans to build a home or business structure on the land, getting a loan will be more difficult. However, there are several options to obtain funding.

Local Banks and Credit Unions

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Start by inquiring with financial institutions located near the land you plan to buy. If you don’t already live in the area, your local lenders-and online lenders-can be hesitant to approve a loan for vacant land. Local institutions know the local real estate market. They may have an interest in facilitating sales in the area where you’re looking. Although local institutions may be willing to lend, they may still require up to 50% as a down payment and relatively short-term loans.

Home Equity

If you have significant equity in your home, you may be able to borrow against it with a second mortgage. With that approach, you could potentially fund the entire cost of the land and avoid using additional loans. However, you’re taking a significant risk using your home as collateral. If you’re unable to make payments on the loan, your lender can take your home in foreclosure.

Interest rates on a home equity loan could be lower than rates on a land purchase loan, but you would be putting your home at risk.

Commercial Lenders

Especially if you’ll use the property for business purposes or an investment, commercial lenders might be an option. To get approved, you’ll need to convince a loan officer that you’re a reasonable risk. Repayment might only last ten years or less, but payments might be calculated using a 15-year or 30-year amortization schedulemercial lenders might be more accommodating when it comes to collateral. They might allow you to make personal guarantees with your residence, or you might be able to use other assets (like investment holdings or equipment) as collateral.

Owner Financing

If you can’t get a loan from a bank or credit union, the property’s current owner might be willing to finance the purchase. Especially with raw land, owners might know that it’s difficult for buyers to secure financing from traditional lenders, and they might not be in a hurry to cash out. In those situations, landowners typically get a relatively large down payment, but everything is negotiable. A 5- or 10-year repayment term is common, but the payments ortization schedule. One benefit of owner financing is that you won’t pay the same closing costs you’d pay traditional lenders (but it’s still worth paying to research the title and boundaries-even honest landowners can make mistakes).

Specialized Lenders

If you’re just waiting for the right time to build, or you’re picking a design for your house, you’ll probably have to use the solutions above. But if you have unusual plans for your property, there may be a lender that focuses on your intended use for the land. Unlike banks (working with people building houses, for the most part), specialized lenders make a point of understanding the risks and benefits of other reasons for land ownership. They’ll be more willing to work with you, because they don’t have to figure out a one-off deal. These lenders may be regional or national, so search online for whatever you have in mind. For example: