Land loans: Qualifications and how to get one
This article is for educational purposes only. JPMorgan Chase Bank, N.A., does not offer land or lot loans. Any information described in this article may vary by lender.
Quick insights
- Land loans can help you secure property before building, but mortgage lenders often evaluate credit score and down payment more strictly than with traditional home loans.
- The type of land you choose can influence your land financing options, including mortgage interest rates and approval requirements.
- Some borrowers may use land loans as a first step toward building a future home by later combining land financing with a construction loan for a primary residence plan.
Whether you’re planning to build your future dream home, invest for later or simply secure a piece of property while you figure things out, buying land can feel like the beginning of something big. A land loan is a type of financing that may help you purchase vacant or undeveloped land before building a home or making future improvements. For first-time homebuyers, knowing how land loans and land financing work can help you feel more confident before making any major decisions.
Unlike traditional mortgages, a loan for a land purchase typically comes with different requirements, timelines and expectations. Simply put, you can finance land, but the process may look a little different depending on the property and your personal financial profile.
Land loans vs. conventional loans
While both options help borrowers finance real estate, land loans work differently than conventional home loans. A conventional home loan is generally used to purchase a move-in-ready home with an existing structure. A loan for a land purchase is intended for vacant property that may eventually be developed in the future. Here’s a comparison of both loan options:
What’s being financed
- Land loans: Vacant land or a lot
- Conventional loans: An existing home
Property readiness
- Land loans: Undeveloped or partially developed
- Conventional loans: Move-in ready
Typical risk level for lenders
- Land loans: Higher
- Conventional loans: Lower
Down payment expectations
- Land loans: Usually higher
- Conventional loans: Often lower, depending on the program
Credit score expectations
- Land loans: Stricter
- Conventional loans: More flexible
Primary purpose
- Land loans: Buy land now, build later potentially
- Conventional loans: Purchase a move-in ready home
Availability
- Land loans: Offered by fewer lenders
- Conventional loans: Widely available
What is a land loan?
A land loan finances a parcel of land without a home on it. Instead of purchasing a home and land together, you finance only the land. You can use this to build a home later, hold an investment or lock in a location before prices rise.
Because the property lacks a structure, lenders view land loans as riskier. Therefore, the approval process requires a strict financial review.
You usually make monthly payments, just like a traditional mortgage. However, terms and structures vary by lender. You might face higher monthly payments due to shorter terms, higher interest rates, or larger down payments.
Construction loan vs. land loan
A land loan only finances the property purchase. A construction loan funds the actual home build. For example, you might buy the property with a land loan, then apply for a construction loan. Some lenders offer combined programs to finance both steps at once. Knowing this difference can help you plan your timeline and budget.
Types of land loans
The land type impacts financing options, terms and down payment requirements. Lenders are assessing development potential, not just the state of the land. Each category can influence how lenders evaluate your loan application for a land purchase.
Raw land loans
Raw land is completely underdeveloped. It may not have road access, sewers, water hookups or electricity. Because there are more unknowns, mortgage lenders may see raw land as a higher-risk form of land financing. This perceived risk could mean the lender requests a larger down payment, a stronger credit score and more documentation around your future plans for the property. Lenders take a cautious approach when providing land loans for raw land because it needs such major development before a structure is even built.
Unimproved land loans
Unimproved land is partially developed. It may have road access or some utilities, but the land is not ready for construction. This offers a balance of affordability and convenience. Lenders may be slightly more comfortable financing unimproved land, but it depends on the lender.
Improved land loans
Improved land is generally the most build-ready option. There are roads, utilities nearby, and the land may already meet local zoning requirements for residential use.
Loan qualifications
Lenders look at several key factors when reviewing a land loan application. A high credit score may unlock better options, while a low score could increase costs. Other common factors include:
- Debt-to-income ratio
- A down payment
- Stable income and consistent employment
- Intended use of the land (like building a primary residence)
- Location and accessibility of the property
- Property reviews (checking local zoning rules, land-use limits, surveys and utilities)
Pros and cons of land loans
Like most financial choices, land loans have benefits and trade-offs. Here are some examples to review when deciding if this loan type fits your goals.
Potential benefits
- May allow you to secure land now and build your primary residence later
- Could give you more flexibility on home design, layout and future build timing
- May help you buy in an area before property values potentially rise
- Open the door for construction financing when lots are improved
- Build value through land ownership
Potential drawbacks
- Often require a large down payment
- Typically expect a stronger credit score
- Often carry higher interest rates
- Involve extra costs when land is raw or unimproved
- Property taxes and maintenance may be needed before building
How to get a land loan: 4 common steps
It can help to think of the process in several stages, each step building on the last. The process may vary slightly depending on the mortgage lender and the type of land financing you choose.
1. Identify the land and confirm the basics
First, choose your property. Lenders will check zoning, roads and utilities to ensure the land supports a home. This confirms the property matches your goals.
2. Complete the loan application
Next, apply for the loan. The lender will review your income, debt, assets and credit score. Expect a stricter financial review than for a standard mortgage.
3. Go through underwriting
Your application then moves to underwriting. The lender verifies your documents and evaluates the risk. It ensures your finances and the property meet their strict guidelines.
4. Close on the loan
If approved, you move to closing. You sign the paperwork, the lender releases the funds, and the ownership transfers according to the closing documents. You can then hold the property or start building.
In summary
Land loans and land financing can open the door to future opportunities; however, getting this type of loan typically requires careful planning, strong financial readiness and a clear vision for your primary residence. Learning about the different types of land and how financing works can help you make an informed, confident choice.
