What You Need to Know about Using a Land Loan

What You Need to Know about Using a Land Loan

Building from scratch isn’t for everyone but can be a rewarding experience. After all, it allows you to craft your vision of the ideal property. Of course, before you get too far into the process, you need to have the land to put your building on. This is where a land loan comes in.

Financing land is different than taking out a loan to purchase a piece of commercial property or existing home. As mentioned, you need a land loan and unfortunately, the terms are often worse than a home loan. However, don’t let that scare you. Here is what you need to know about using a land loan.

What is a Land Loan?

You can use a land loan to purchase raw land, unimproved land, or improved land. You can use it for land for a home or business to be built on. A land loan is riskier than other types of loans because:

Default rates are higher
Greater chance of borrower walking away
A vacant plot isn’t ideal collateral

A land loan has higher interest rates and the credit requirements are stricter and the down payment is higher than other loans because of these risks.

What You Need to Know When Buying Land

The terms on a land loan depend on a variety of factors:

The type of loan
Your plans for the land
The lender you work with

As mentioned, there are three types of land that lenders are willing to finance:


Each has advantages and disadvantages.

Raw Land

This is completely undeveloped land. There is no access to nearby roads and no plumbing or electricity. It’s a blank slate. While raw land is cheaper than developed, it may end up costing you more in the end.

Since purchasing raw land is risky for lenders, they typically compensate by requiring high down payments and charging high-interest rates. Also, as with other loan types, a solid down payment and good credit score will get you approved for a raw land loan and will qualify you for the best terms. Additionally, it’s helpful if you’re ready to start developing immediately and have a plan for how you are going to use the land.

Unimproved Land

The next type of land loan is for unimproved land. This is sometimes the same as raw land, though typically unimproved land does have access to basic utilities, just lacks major items such as a natural gas meter, electric meter, or phone box. There are some improvements from the raw state.

Often, qualifying for an unimproved land loan is easier than qualifying for a raw land loan, but it’s still risky for the lender. You will need a good credit score, a decent down payment, and plans for the land.

Improved Land

Since this land is fully developed and considered “construction-ready”, improved land is the most expensive type of land. However, it’s often easier to qualify for a loan and the down payment requirement and interest rates are lower.

Finding the Best Land Loan Lender

If you need a land loan, contact Gipson Commercial Solutions. We’ll be happy to help you learn more about your options and get you approved for a land loan.