We purchased 24 acres of raw land on a mountainside in West Virginia in 2023. We wanted the space to be able to camp with friends, and do creative things with the landscape (create trails, have a garden, and potentially even build a home). Since we didn’t have plans to build anything on it in the short-term, we needed to secure a land loan (as opposed to a conventional home loan). I had no idea that land loans would be so different from (and riskier than) conventional home loans. We ended up going with the seller’s agent recommendation for where to get a land loan and had no issues. We did not have a buyer’s agent in this process.
Below are some details as to the differences between land loans and conventional home loans.
Land Loan
A land loan is used to finance the purchase of vacant land or a lot. Land loans are considered riskier by lenders since the land itself does not generate income or provide collateral in the same way a completed home would.
Conventional Home Loan
A conventional home loan is a mortgage loan used to purchase or refinance an existing home.
Comparison between the two
| Land Loan | Conventional Home Loan | |
| Purpose | Used to purchase vacant land or a lot. | Used to purchase or refinance an existing home. |
| Interest Rates | Typically higher interest rates Since land is considered a riskier investment for lenders, they often charge higher interest to offset this risk. | Generally lower interest rates. |
| Loan Terms | Often have shorter terms ranging from 5 to 15 years. Ours is 10 years. | Typically longer, commonly 15 or 30 years. |
| Down Payment | Typically requires a larger down payment (e.g., at least 20%). | Amount can vary based on factors such as credit score, loan amount, and loan program. |
| Collateral | The land itself serves as collateral for the loan. If the borrower defaults on the loan, the lender can seize the land to recover their investment. | The home serves as collateral for the loan. If the borrower defaults, the lender can foreclose on the home to recover their investment. |
| Approval Criteria | There may be stricter approval criteria for land loans, as they are considered riskier investments. Examples include having a higher credit score and proof of the land’s value and intended use. | Generally requires a good credit score, stable income, and a low debt-to-income ratio. |
Finding lenders who offer land loans
Not all lenders offer land loans. For us we were referred to a local lender by the realtor we worked with. Below are other ways to find a lender.
Check with local banks and credit unions
Start by contacting local banks and credit unions in your area. They are more likely to offer land loans as they are more familiar with local zoning and land use regulations, making them better equipped to assess the value of the land and its potential. They also may have a better understanding of the local market and may offer more personalized service.
Consult with a realtor familiar with raw land
Realtors who specialize in land sales may be able to recommend lenders who offer land loans. They can also provide valuable insights into the local market and lending environment.
Also as a side note, land lot realtors will have a deeper understanding of local zoning laws and can advise on how the land can be used and any restrictions that may apply, including feasibility of building on the land (e.g., utilities, access roads)
Check with land development companies
Companies that specialize in land development may have relationships with lenders who offer land loans. They may be able to provide you with referrals or recommendations.
Why don’t more national banks offer land loans?
Similar to how not all realtors specialize in raw land, not all banks offer land loans.
Risk factors
Land loans are considered riskier for lenders compared to traditional mortgages because vacant land does not appreciate in value as quickly as developed property. As a result, lenders may be more cautious about offering these types of loans.
Lack of infrastructure
Financing land purchases often requires specialized knowledge of zoning laws, land use regulations, and environmental considerations. National banks may not have the infrastructure in place to assess these factors for land loans on a large scale.
Market demand
Demand for land loans may not be as high as for traditional mortgages as people who purchase land often do so as an investment or for future development, rather than as a primary residence. The lower demand may make it less profitable for national banks to offer land loans.
Our experience overall
The process was a lot more casual compared to what we had been through with conventional home loans, but we did not run into any issues.
We might want to roll our land loan into a construction loan if we decide to build a house, but we’ll revisit this for another day!
