Thinking about purchasing land for building a home, starting a business, or investing?
Getting money for something called a “land loan” might be a good option.
But what exactly is a land loan? And how does it differ from a traditional mortgage, or a construction loan?
Peregrine Financial's team of experienced mortgage brokers in Santa Clarita can explain everything you need to know about land loans: from how they work, to land loan interest rates, to the different types available, how lenders offer land loans, and what you should consider before buying a lot for your dream home.
Understanding Land Loans
A land or lot loan is a type of financing, or mortgage loan, used to purchase a piece of land. Unlike traditional home loans that fund the purchase of an existing property, land loans provide the capital needed to buy undeveloped or improved land.
Because these loans carry more risk for lenders, land loans tend to come with different terms, higher land loan rates regarding interest, and stricter qualification requirements.
Types of Land Loans
There are several types of land loans. The right one for you depends on what you plan to do with the land and how soon you intend to develop it.
Raw Land Loans - Raw land refers to completely undeveloped land with no utilities, roads, or structures. Because raw land requires more investment to make it usable, lenders view it as a high-risk purchase. As a result, raw land loans typically require larger down payments, higher interest rates, and strong borrower qualifications. If you’re considering buying raw land, you should have a well-detailed plan for development to help improve your loan approval chances.
Unimproved Land Loans - Unimproved land is similar to raw land, but may have some utilities or minor infrastructure, such as access to roads or water. These loans are slightly less risky than raw land loans, but they still come with higher rates and down payment requirements compared to a traditional home loan.
Improved Land Loans - Improved land refers to plots that already have access to utilities like water, electricity, and sewage systems. These loans are easier to obtain because the land is closer to being ready for construction. Improved land loans typically have better interest rates and terms than raw or unimproved land loans.
How Do Land Loans Work?
Land loans work similarly to other types of financing, but they typically have stricter requirements:
Higher Down Payments – Most land loans require a down payment of 20-50%, depending on the loan type and lender.
Shorter Loan Terms – Unlike traditional mortgages, which often have terms of 15 to 30 years, land loans usually have shorter repayment periods, ranging from a few years to 15 years.
Higher Interest Rates – Because land loans carry more risk, they usually come with higher interest rates compared to home mortgages.
Stricter Qualification Criteria – Lenders will look for a strong credit score, financial stability, and a clear plan for using the land before approving a loan.
How to Get a Land Loan
Qualifying for a land loan requires preparation, which Peregrine Financial can help with, and a strong financial profile. Lenders typically look for:
A Minimum Credit Score – A higher credit score improves your chances of securing a loan with favorable land loan terms.
Large Down Payment – The more money you can put down, the better your chances of loan approval and securing a lower interest rate.
Clear Development Plans – If you’re planning to build on the land, having detailed plans, blueprints, and cost estimates can increase your approval odds.
Debt-to-Income Ratio – Lenders want to see that you have a manageable level of debt compared to your income.
How to Buy Land
If a land loan isn’t the right fit, or you run into land use restrictions, there are alternative ways to finance a land purchase:
Seller Financing – Some landowners offer financing options where you make payments directly to them rather than through a traditional lender.
Home Equity Loan or HELOC – If you already own property, you may be able to use your home’s equity to fund the land purchase.
USDA or VA Loans – If you qualify, the U.S. Department of Agriculture (USDA) and the Department of Veterans Affairs (VA) offer loans for rural land purchases under certain conditions.
Is a Land Loan Right for You?
A land loan can be a great option if you have a vision for a piece of property and a solid financial plan to back it up. However, there can be challenges, including higher down payments, interest rates, and qualification requirements.
At Peregrine Financial, our specialty is assessing a client's finances and getting them as close as they can to the loan they want, or need. We take everything into consideration and have a proven track record of success.
Reach out to use today for more information.
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