A land loan Calculator, also called a raw land loan, is financing specifically designed to help you purchase a vacant plot of land. These loans allow buyers to acquire property they intend to hold or develop over time without paying the full amount upfront. Land loans provide funding for various types of vacant land, including plots for future residential or commercial development, farmland, and recreational properties like hunting grounds.

Land loans can be beneficial for:

• Real estate investors and developers seeking to acquire property for future projects. The loan provides capital to buy land well in advance of development and construction.

• Farmers and ranchers looking to expand their acreage. Land loans allow them to enlarge their holdings and operations.

• People want land for personal use. For example, someone may wish to buy a wooded acreage for a future home site or recreational retreat. A land loan makes this possible without tapping current home equity or savings.

A land loan offers flexible financing for land buyers who lack sufficient cash on hand to make large upfront payments. While the land itself generates no income, lenders provide these loans with the expectation that the property will increase in value over time as the buyer holds or develops it.

Determining If You Qualify for a Land Loan

When applying for a land loan, lenders will evaluate your finances to determine if you qualify. Here are some key factors they will consider:

Credit Score Requirements

Most lenders will want to see a credit score of at least 620-640 to qualify for a land loan. The higher your credit score, the better your chances of approval and securing a lower interest rate. If your credit score is below 640, you may need to improve it before applying.

Down Payment

Lenders typically require a down payment of 20-25% for a land loan. This down payment demonstrates you have “skin in the game” and lowers the lender’s risk. With a larger down payment, you may qualify for a better loan rate and terms. First-time land buyers sometimes qualify for loans with just 5-10% down.

Debt-to-Income Ratio

Your debt-to-income (DTI) ratio compares your monthly debt payments to your gross monthly income. Most lenders want your DTI to be 43% or lower when applying for a land loan. A lower DTI ratio increases your chances of approval and securing better loan terms. Paying down debts can help improve your DTI.

By reviewing your credit score, down payment funds, and DTI ahead of time, you can get a sense of whether you may qualify for a land loan. Consulting with a lender early in the process is also wise to understand what they are looking for in applicants.

Interest Rates on Land Loans

Land loans tend to have higher interest rates than traditional home loans or mortgages since they are seen as a higher risk by lenders. The average interest rate on land loans currently ranges between 5-10%. However, land loan interest rates can vary significantly depending on several factors:

• Your credit score – borrowers with higher credit scores can qualify for lower rates, while those with poor credit will pay higher interest. Lenders view borrowers with higher credit scores as lower risk.

• The loan-to-value ratio – if you make a larger down payment, reducing the amount you need to borrow, you may qualify for a lower rate. Higher LTVs are seen as higher risk.

• The size and term length of the loan – shorter-term loans tend to have lower interest rates since the lender’s money is at risk for less time. Larger loan amounts may also mean higher rates.

• Economic conditions – interest rates tend to be lower when the economy is weaker and higher when it is stronger. The Federal Reserve also impacts rates.

• Competition among lenders – comparing rate offers from multiple lenders can help you secure the lowest rate. Local banks and credit unions may offer better terms than national lenders.

Shopping around and improving your credit score are two of the best ways to get the lowest interest rate possible on a land loan. Be sure to discuss rate options with your lender. Even a small change in the interest rate can make a difference over the life of the loan.

Land Loan Terms

When taking out a land loan, one of the most important factors to consider is the loan term or length of the loan. Land loans typically have longer repayment terms than other types of loans. Here’s an overview of common land loan term lengths and the pros and cons of each:

5-Year Land Loan

A 5-year land loan term is on the shorter side for land loans.

Pros

• Pay off the loan faster
• Accumulate less interest over the life of the loan

Cons

• Higher monthly payments since you’re paying over a shorter time
• May not be enough time to build up equity in the land

10-Year Land Loan

A 10-year term is a moderate length that offers a balance of pros and cons.

Pros

• Monthly payments are more affordable than a 5-year term
• Adequate time to build equity in most cases

Cons

• Total interest paid will be higher than a shorter term
• Loan will take longer to pay off than a 5-year term

15-Year or 20-Year Land Loan

Longer 15-year and 20-year land loans are common.

Pros

• Lowest monthly payments, making the loan more affordable
• Plenty of time to build substantial equity in the land

Cons

• Will pay significantly more total interest over the life of the loan
• Will be making payments for a long period of time

When choosing a land loan term, it’s important to balance the monthly payment amount with your long-term goals for the property. Speak with a loan officer to determine the right term length for your situation.

Land Loan Lenders

When it comes to obtaining a land loan, you have several options for lenders including banks, credit unions, and online lenders. Each type of lender has its pros and cons to consider.

Banks

Banks are one of the most traditional sources of land loans. Banks have extensive experience with real estate lending and may be more flexible than other lenders when it comes to land loans. Large national banks tend to have the most resources for specialized real estate loans. The downside is that banks often have stricter eligibility requirements, such as higher credit scores or income requirements.

Credit Unions

Credit unions are member-owned nonprofits that function similar to banks. Credit unions cater to specific membership bases, such as teachers, different industries, or geographic regions. Credit unions may offer more personalized service and lower rates than big banks. However, they may have less flexibility for unique real estate loans. The eligibility requirements also tend to be stricter for members only.

Online Lenders

Online lenders have grown in popularity in recent years. Online lenders provide the convenience of applying for and managing a land loan entirely online. They may offer faster approvals and funding. Interest rates may also be lower without brick-and-mortar overhead costs. However, customer service options are more limited without in-person branch interactions. Make sure to research any online lender thoroughly before applying.

When applying for a land loan, it’s wise to compare multiple lenders. Consider both online and local lending options. Look for lenders that offer competitive rates along with flexibility for your specific financial situation and land goals.

The Land Loan Process

The process of obtaining a land loan generally follows these steps:

1. Pre-Qualification – Most lenders will want you to get pre-qualified before formally applying for a loan. This involves submitting financial documents so the lender can evaluate your credit, income, assets and debts to determine the loan amount you may qualify for.
2. Formal Application – Once pre-qualified, you’ll fill out a formal loan application and submit all required documentation. This includes tax returns, bank statements, appraisal of the land, and any other paperwork the lender requests. 
3. Underwriting – The lender will verify all documentation and information on your application through a process called underwriting. They analyze your eligibility and risk to decide whether to approve the loan.
4. Loan Estimate – Within 3 days of applying, you’ll receive a Loan Estimate from the lender detailing estimated costs like origination fees, closing costs, etc. 
5. Appraisal – The lender will order an appraisal to confirm the land’s value supports the requested loan amount. You may have to pay for this upfront.
6. Loan Approval – With all verifications and documents complete, the lender decides on approving your loan and offers a loan commitment letter detailing the exact loan terms.
7. Closing Disclosure – At least 3 days before closing, you’ll get a Closing Disclosure outlining the final loan costs, fees and disbursements. 
8. Closing – You’ll sign the final loan documents and the lender will disburse the loan amount (minus closing costs). The land title transfers to you once the loan is paid out.
9. Funding – The lender will distribute the loan funds to the seller, settlement agent and other parties. You’ll receive any leftover amounts.
10. Post-Closing – The lender will record and transfer the deed to you. You’ll make your first loan payment within 30-60 days of closing.