Land loans: How they work, requirements, and loan options

Land loans finance the purchase of vacant or undeveloped property, usually consisting of land you plan to build on now or later. But a loan to buy land is different from a mortgage used to buy a home. Not every lender offers land loans, and the financing requirements can vary a lot from a traditional home mortgage. Here's how to get a land loan, how they work, and what to expect with requirements, rates, and alternatives.

Key takeaways:

• Land type can make a big difference in cost. Raw land may require 30% – 50% down, compared with about 20% – 30% for unimproved land and 15% – 20% for improved land.
• Land loans can be harder to qualify for than traditional mortgages. A credit score of 670 or higher and a DTI of around 43% or less are common requirements, but vary between lenders
• Your plans for the land should guide your financing choice. A stand-alone land loan may work if you want to build later, while some government-backed construction financing may offer better options if you’re ready to build a primary home.

Land loans vs. conventional mortgages

A conventional loan is a mortgage that isn’t part of a government program, and is secured by an existing, livable residential structure. Because there is already a structure serving as tangible collateral, lenders generally view conventional mortgages as less risky than land loans.

Land loans, on the other hand, finance vacant or undeveloped property. Because land doesn’t usually have improvements or structures that act as collateral, lenders generally consider it a higher-risk investment than an existing home.

If a lender forecloses on a home, it can sell the home to recoup its losses with relative ease. Undeveloped property is typically more challenging to sell.

To offset the increased risk, lenders often ask for a larger down payment than a traditional home loan, a stronger credit profile, and a shorter loan term for repayment.

However, if you’ve done your research and are financially prepared for the costs associated with building a house, a land loan might be the right financing option for you.

What is a land loan?

A land loan – sometimes called a lot loan – finances the purchase of a piece of land. Land loans can be used for residential or business purposes, and some lenders also finance recreational property.

Lenders will consider the appraised value of the land itself, as well as your income, assets, and creditworthiness. Land appraisals can sometimes take around 3 to 4 weeks because the appraiser may need to evaluate comparable sales, development potential, restrictions, easements, and other property characteristics.

If you're buying land to build a house, a land loan can secure your preferred location even if you're not ready to hire an architect or pour a foundation. Once your loan is approved, you’ll make regular monthly payments with interest – much like you would with a traditional mortgage – until the land is fully paid off.

Construction loans vs. land loans

A construction loan is a short-term loan used to cover the cost of building or substantially rehabilitating a home. To build on land, you’ll need to use a land loan to buy the land, then a construction loan to build a home on it. Some construction-to-permanent loans can combine the land purchase and construction costs into one transaction.

Construction loans generally have much shorter terms than land loans – often around 1 year, whereas land-only loans have terms of up to 15 years – and the funds aren’t handed to you in a lump sum. Instead, they’re paid out to your builder in staged installments, known as "draws," as your project reaches specific milestones such as pouring the foundation, framing the walls, or finishing the roof, with loan payments starting anywhere between 6 to 24 months after the loan originates.

Once the physical construction of your property is complete and you receive a certificate of occupancy, many homeowners choose to refinance their short-term construction loan into a traditional mortgage. This simplifies your monthly payments and safely consolidates closing documents. That way, you aren't juggling multiple high-interest loans while moving into your new home.

Types of land loans

Three common categories of land: raw land, unimproved land, and improved land. Each category of land comes with different characteristics, down payment requirements, and levels of risk for lenders.

Raw land loan

Raw land loans are for completely undeveloped land, with no access to electricity, sewers, or roads. Financing raw land can also be challenging because there’s no infrastructure supporting the property’s value and additional work is required before construction can begin, with many lenders wanting a detailed development plan.

Raw land loans will also typically need a down payment of around 30% – 50%. While raw land may be cheaper to buy than more developed land, interest rates will also likely be higher than other types of land loans.

Unimproved land loan

Unimproved land is somewhat more developed than raw land and may already have access to some infrastructure, like water and electricity. However, unimproved land still needs significant improvements before it's livable, and those development costs should be factored into the final budget.

That’s why buyers interested in unimproved land should have a clear picture of what has and hasn’t already been completed before making an offer, and should plan on a down payment of around 20% – 30%. Interest rates will likely also be lower than raw land, but higher than rates for fully improved land or traditional mortgages.

Improved land loan

Improved land is ready or closer to ready for construction, and typically already has access to roads, electricity, and water. Because the necessary infrastructure adds value and reduces the work needed before construction, lenders usually view improved land as less risky than raw or unimproved property.

Minimum down payments for improved land loans can range from around 15% – 20%, and tend to come with lower interest rates than financing for raw or unimproved land. However, the readiness of the land might also come with a larger purchase price.

Land loan rates, terms, and costs

Land loans can cost more on the back end than a mortgage on an existing home, since undeveloped property is seen as riskier for lenders. Here's what drives the higher price tag.

Down payments

Down payments scale with how developed the land is. Land type, acreage, and the lender will all affect preferred minimum down payment requirements.

• Raw land may require anywhere between 30% – 50% down.
• Unimproved land may require approximately 20% – 30% down
• Improved land may require around 15% – 20% down in some cases.

Government land with construction loan programs are the exception, with eligible USDA rural lots and VA-backed loans often offering 0% down.

Interest rates and terms

Because vacant land is harder to resell, lenders charge higher rates and have shorter terms than a standard mortgage.

Land loan interest rates can swing up to around 10%, while loan terms might go up to 15 years – about half the length of a traditional 30-year mortgage.

Rates can change with market conditions, the type of land you’re financing, your location, your lender, and your personal financial background, so always confirm current pricing with potential lenders before committing.

Fees and closing costs

Land purchases still involve closing costs, which can include lender fees, title work, an appraisal, escrow or settlement charges, surveys, recording fees, and transfer taxes, depending on the property and how you finance the purchase.

Buyer closing costs on financed land purchases might run about 2% – 5% of the loan amount, while land appraisals could cost anywhere from $500 – $1,500. Other common expenses can include title searches of roughly $75 – $200, recording fees around $125, and land surveys ranging from about $400 – $1,000.

Land loan qualifications

The exact eligibility requirements for a land loan will be different based on the lender you choose, your location, and your loan type. Here are some general requirements for this financing option:

• A detailed plan explaining the land use and whether it will be residential or commercial
• A down payment of at least 25%, though it could be higher or lower depending on the land type
• A credit score of at least 670, with some land financers wanting to see credit scores of 700 or even higher
• A debt-to-income ratio (DTI) equal to or less than 43%
• Higher loan-to-value (LTV) ratios, depending on the land and loan type: 50% max for raw land, 60% – 70% for unimproved land, and 75% – 80% for improved or residential lots
• Various property checks, including city/county zoning verification, land-use restriction verification, land surveys, and utility checks

What does land use mean?

“Land use” indicates to a lender how the land will be used and for what purpose, including agricultural, residential, industrial, mining, and recreational activities.

Each local government determines how land in its jurisdiction will be used, preserved, or protected, and issues permits to builders accordingly. When it comes to land loans for building a home, governments want to know whether the land will be used for a primary residence or for commercial purposes.

Primary residences

According to the IRS, a primary residence is where you spend most of your time and the address that appears on your most important documents, like your driver's license and income tax return. If the land is going to be the location of your future home, it needs to be zoned as residential or mixed-use.

Commercial properties

Commercial use means that the land will be used for business purposes. Buying commercial real estate can be a worthy investment, though the application process is different. Lenders likely will ask for a business proposal and other supporting documents before approving the loan.

Where to get a land loan

Land loans aren’t available from every mortgage lender, so you may need to look beyond the bank or mortgage company you’d normally use to buy a home. Not all lenders finance vacant land, and those that do may have different requirements depending on whether the property is raw, unimproved, improved, residential, or recreational.

Banks, credit unions, and land lenders

Banks and credit unions that specifically offer land loans are a good place to start if you want to buy a residential lot, recreational property, or vacant land that you don’t plan to build on immediately.

Because land loan programs vary by lender, compare down payment requirements, interest rates, repayment terms, acreage limits, and rules for road and utility access. Local lender options might also have a better understanding of local land values and zoning quirks.

Government-backed options if you plan to build a home

If you’re buying land with immediate plans to build your primary residence, you may have more options than a traditional stand-alone land loan. USDA, VA, and FHA-backed financing can all support new-home construction in certain circumstances, but eligibility and lender availability vary.

USDA loans: USDA construction loans allow qualifying borrowers to buy land and build a home in an eligible rural area, with one set of closing costs and 0% down for some borrowers.

VA loans: Eligible veterans, service members, and surviving spouses may use a VA construction loan to finance the purchase of land and construction costs of a primary residence together. Qualifying borrowers may also be eligible to refinance an existing construction loan into a VA-backed loan.¹

FHA loans: Similar to the above, FHA offers a construction-to-permanent loan that finances the purchase of land and construction of a primary residence into one loan with a single closing. The typical FHA benefits apply: more flexible credit criteria, low down payment options, and forgiving loan-to-value ratios.²

State and local land loan programs

Don’t overlook programs close to home. Some states and local governments have land-purchase, home building, veteran, or home buyer assistance that can make financing more affordable. Depending on where you live and what you’re buying, that could mean a lower down payment, better loan terms, or help tied to building a primary residence.

Texas is one example: through the Veterans Land Board (VLB), some Texas veterans and military members can finance eligible land with as little as 5% down, with loans up to $200,000 and 30-year fixed-rate terms.

Agricultural and rural land lenders

If you’re purchasing farmland, pastureland, or acreage for agricultural use, look for lenders that specialize in agricultural and rural real estate. Farm Credit institutions and agricultural lenders offer financing designed around farm property and can evaluate factors such as the land’s intended use and your plans for the property.

Commercial land financing

If you’re buying land for a business, residential land-loan programs aren’t the right fit. Commercial banks and business lenders might offer commercial real estate loans instead, and qualifying small businesses can also consider an SBA 504 loan.

SBA 504 financing can be used to purchase land, existing buildings, or new facilities. A typical 504 project is financed with up to 50% from a private lender, up to 40% through the SBA-backed CDC portion, and at least 10% from the borrower. The SBA-backed portion can be as high as $5.5 million, with 10-, 20-, and 25-year terms available.

5 steps to get a land loan to build a house

While the application resembles getting a mortgage in some ways, land loans might require some extra steps and may have stricter requirements.

1. Write a plan for the land

Lenders will ask you for a detailed plan for how you plan to use the land. The plan may need to cover development timelines, infrastructure needs, and your strategy for making the property livable or functional.

2. Pick the type of land you want to buy

After you've developed your plan, you should have a better sense of what specific type of land fits your needs and budget. For example, improved land may make sense if you want to start building soon and you need access to roads and utilities, while unimproved land can give you more flexibility if you're comfortable adding some infrastructure yourself. If you're looking for a more remote property, recreational acreage, or land you plan to hold and develop over time, you might look at raw land, as long as you account for the extra work needed to make it usable.

3. Find a lender that provides land loans

Banks, credit unions, specialty lenders, and government programs may all provide land financing, depending on the property and borrower. Compare rates, down payment requirements, terms, qualification standards, and fees before selecting a lender. It can also be worth it to talk with several lenders rather than accepting the first offer.

4. Hire a real estate agent who specializes in land sales

A specialized real estate agent with experience in land sales can help you find a property and negotiate on your behalf, as well as help you evaluate properties and navigate issues such as zoning, access, utilities, development potential, and local market conditions.

5. Prepare your documents and get preapproved

Land loan applications typically require standard financial documentation, including proof of income, tax returns, bank statements, and information about your existing debts. Like a home mortgage, getting preapproved can help you determine what a lender is willing to loan you and how much of a down payment you may need.

Other land-purchasing options

A land loan isn't the only way to purchase a plot of ground. Here are some alternative options.

Home equity loan

A home equity loan is a second mortgage secured by your home's equity, or increase in value. You can typically borrow around 75% – 85% of your home’s equity. For example, someone with $300,000 in home equity may be able to borrow approximately $225,000 – $255,000 for the purchase of land.

Repayment terms vary by lender but generally last 5 – 30 years. If you default on the loan, you run the risk of losing your primary home.

Seller financing

Seller financing agreements are sometimes called land contracts. Seller financing involves the buyer making payments directly to the seller instead of paying them all at once through cash or lender financing. Essentially, the seller is lending the buyer the money to finance the purchase.

Seller financing can be especially useful for aspiring land buyers who are struggling to qualify for a land loan or afford a large down payment. However, terms can be shorter, usually up to 5 years, which can also mean larger monthly payments and potentially a balloon payment at the end of the term.

Keep in mind that in most cases, the seller retains legal title to the property until you pay off the loan. Your seller also may charge you a higher interest rate, and the terms of your contract may be more vague than if you were dealing with a financial institution.

Pros and cons of land loans

Before you decide on a land loan, consider the following potential benefits and drawbacks.

Pros

• The opportunity to build the home of your dreams from the ground up
• You can buy land now and build your home later, depending on your financing type
• Land loans can come with better terms and more security than unsecured loans

Cons

• Lenders view land loans as riskier investments and often require higher minimum credit score and down payment requirements
• Some lenders want to see smaller debt-to-income ratios from borrowers than for a traditional mortgage
• Fewer lenders offer land loans, meaning there could be less opportunity to shop around

FAQ

Is it hard to get a loan just for land?

It can be harder than getting a traditional mortgage because vacant land is looked at as riskier collateral. Expect lenders to look closely at your credit, down payment, DTI, and plans for developing the property.

Do you have to put 20% down on land?

Usually more. Raw land often requires 30% or more; other types of land loans may allow less, but still often require at least 20% down. Exceptions: some government-backed construction financing or state-led land loan programs may offer eligible borrowers lower or even 0% down options.

What loan is best for buying land?

It depends on what you plan to do with the property. A bank or credit union may be a good fit for a standalone land purchase, while USDA, VA, or FHA financing may make more sense if you’re ready to build a primary home; agricultural and SBA loans serve more specialized uses.

Does one land loan approval cover every offer?

Not always. Because the land itself is part of the lender’s decision, switching properties may require a new review of the appraisal, zoning, access, utilities, and other parcel-specific details.

The bottom line: Match the loan to the land and your plans

A land loan can be a good way to hold onto a property before you’re ready to build, but the financing should fit both the land and your build plans. Before choosing a lender, don’t just look at interest rates; compare the down payment, loan term, closing costs, development expenses, and property requirements so you have a better idea of the total cost and what to expect.

It’s also worth checking whether a traditional land loan is actually your best option. If you plan to build soon, a construction-to-permanent or government-backed program may simplify the process, while state programs, seller financing, or home equity could offer another path depending on your situation.

Your land purchase may be only the first step. If you already own a home, a Rocket Mortgage Home Equity Loan could help you tap your existing home’s value for your next project without refinancing your current mortgage. And when construction is complete, Rocket Mortgage refinancing options can help you explore moving into a traditional mortgage with terms that better fit the finished home.^{3, 4}

¹Rocket Mortgage is a VA-approved lender, not endorsed or sponsored by the Dept. of Veterans Affairs or any government agency.

²Rocket Mortgage is not acting on behalf of FHA or HUD.

³Refinancing may increase finance charges over the life of the loan.

⁴Home Equity Loan Product is a second standalone lien and may not be used for piggyback transactions. Valid for loan amounts between $45,000.00 and $500,000.00 (minimum loan amount for properties located in Michigan is $10,000.00). Not available on Ameriprise products. Additional restrictions, terms, and conditions apply. Must meet qualification requirements. This is not a commitment to lend.

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