A land loan can be the first step in a profitable commercial development project. The loan application process can be more complicated than the loans you have applied for in the past. It may help you to understand some of the unique details.
In this guide, you’ll get a quick introduction to land loans and what to expect. You’ll learn what kind of assets land loans can cover, how to qualify, and some pros and cons of this type of financing.
Types of Land Loans: Raw, Unimproved & Improved
Not every piece of land is treated the same by a lender. The type of loan you qualify for depends on what shape the land is in today and how ready it is for your profit plan. Understanding this is the first step in the loan application process.
How a lender sees the value of your land may first depend on what type of land it is. Your land may be easier or harder to secure a loan for, depending on whether it is:
Improved Land
Improved land is the closest thing to an existing home or commercial site. It already has utilities like water, power, and road access. Because it’s ready for construction, this loan usually comes with more favorable terms.
Borrowers may find lower interest rates, smaller down payment requirements, and repayment periods that look more like a traditional mortgage. If your goal is a new development of any kind, an improved land loan is often the most straightforward path.
Unimproved Land
Unimproved land sits in the middle. You might have some infrastructure. Maybe a gravel road or partial utilities, but it’s not fully developed. Lenders see this as moderate risk.
That means you may face higher down payments, shorter terms, and a more careful review of your credit score and debt-to-income ratio. Credit unions and local banks often offer lot loans in this category, especially for borrowers buying land in rural areas.
Raw Land
Raw or vacant land has no improvements. Think of a plot of land with nothing but dirt and trees. Financing options here are limited, and loan terms are often strict. Raw land loans tend to carry higher interest rates and larger downpayment requirements.
Sometimes, 30-50% of the purchase price, and short-term repayment schedules. A lender may also ask for a clear plan to profit before approving the loan amount.
How to Qualify for a Land Loan
Getting a land loan isn’t like a traditional mortgage. Lenders take on more risk and want proof you can carry it. Here’s what they look for.
Credit Score
A strong score matters to traditional lenders, but private lenders aren’t bound to use it as a factor. If you’re borrowing from a conventional institution, aim for 680 or higher.
The better your creditworthiness, the more favorable the terms. You’ll see. Lower interest rates, easier repayment terms, and a smoother application process.
Down Payment
Be ready to pay more up front. While a home mortgage might ask for 10-20%, land loans often need 20-50%. Lenders may ask for an even larger down payment for raw land loans. Think of it as your skin in the game.
Debt-to-Income Ratio
Your monthly payment can’t stretch your budget too thin. Lenders check your income against existing debt to see if the loan amount fits. Keep your debt-to-income ratio steady to improve eligibility.
Land Use
A piece of land for a dream home in town is easier to finance than vacant land in rural areas. A lender wants to know if you’re building a primary residence, an investment property, or using a construction loan. Your plan shapes the type of loan you qualify for.
The Process
Most borrowers start with pre-approval. A credit union or bank reviews your finances, the purchase price of the plot of land, and your loan options. From there, you move into the loan application and underwriting. Each step brings you closer to owning that piece of real estate.
Pros and Cons of Land Loans
A land loan can open doors. But it also comes with trade-offs compared to buying completed assets for your projects. Knowing both helps you make a better decision.
Pros of Land Loans | Cons of Land Loans |
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FAQs
Can I use a land loan for farming or a small business?
Yes. Many borrowers use land loans for agriculture or to set up a small business in rural areas. Some lenders even connect you with USDA loans or SBA programs if the purpose fits.
Do land loans cover construction costs too?
No. A land loan covers only the purchase of the plot of land. If you plan to build, you’ll need a separate construction loan or a combined package that rolls land and building costs into one.
Is getting a land loan through a local bank or credit union easier?
Often, yes. Local lenders know the area and understand the value of undeveloped land. They may offer competitive rates or flexible repayment terms compared to national banks.
Secure a Land Loan Today with Pacific Northwest Capital Partners
Buying land is a big step. You can turn a plan on paper into land you own with the right lender.
At Pacific Northwest Capital Partners, we guide borrowers through every step of the loan application. From pre-approval to closing, you’ll get clear answers, competitive rates, and a working process. Feel free to explore our loan programs.
If you’re ready to move from thinking about a piece of land to actually owning it, contact us today. Let’s get you closer to the ground you’ll call yours!
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