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What is a Land Loan?

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  • Written By: Ken Black
  • Edited By: Andrew Jones
  • Last Modified Date: 20 September 2016
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A land loan is a financing option that is meant to be used just for the purchase of land. Loans of this type, often referred to as land mortgage loans, are somewhat harder to get than more traditional real estate loans, which include not only the land, but also the developed property. Many different factors can go into an approval for a land loan, including future plans, and the down payment.

Like any type of loan, in order to make the investment attractive to a lender, there must be a reasonable assurance there will be a return on the investment. Thus, those who are interested in developing the land will be considered less of a risk than those who want to keep the land undeveloped. Undeveloped land is easier for an owner to walk away from, considering there is nothing on the land that ties the owner to it financially, other than the land loan itself.

Therefore, it is likely that anyone seeking a land loan may be asked what they are planning to use the land for. If the land is tied to income, as in the case of farm land loans, the risk will be seen as smaller. Those who want the land for recreational use, such as for equestrian activities, hunting or fishing may be required to take additional measures so that the lender will feel comfortable making the loan.

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In most cases, a down payment for undeveloped land will likely be more substantial than a down payment for land that is already developed, or which is in the process of being developed. Some lenders may require as much as 50%, though 20% is more of an industry standard. This type of a down payment means the land loan already has built-in equity. This down payment is in direct contrast to what is normally required for a home, or a piece of otherwise developed land. In some cases, loans on developed land, especially private homes, may be granted with no money down.

For those who already have developed land paid off, or who have built up substantial equity in developed land, that property may be used as collateral for an undeveloped property. This will reduce the down payment required for an undeveloped land loan and could be a good benefit for the borrower. This will, however, put at risk a piece of land that the owner has more invested in, and may even use as a primary source of income or residence.

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NathanG
Post 3

@Charred - If I were a banker I would be more inclined to extend an agricultural land loan than one that was simply to build commercial properties. That’s because I think that land should benefit the environment as much as possible.

The fact is that there are too few farms in America in my opinion and if we can help establish more farms we would be better off overall.

Which would be the safer bet – a loan for farm land or one for commercial development? While many would say the commercial loan is the sure thing, the fact is that real estate has taken a nosedive in the past few years. I say the farming industry is the better investment.

Charred
Post 2

@miriam98 - Well I must not be too astute then. Mine is a story of failure. When I got married my wife’s uncle purchased a piece of property down in Florida.

Over the course of time that land and its title deed got transferred to us. We held on to it, and then got a call that it had turned into swamp land.

We were asked what we wanted to do – try to develop it (can you salvage swamp land?) or sell it. I had no idea what to do, as I was not into real estate. Swamp land didn’t sound good however so we sold it to the lowest possible bidder.

Maybe we were dumb, who knows, but I was glad to have it off my hand.

miriam98
Post 1

A friend of mine was very successful in this regard. He was quite astute about real estate and some time ago purchased a piece of land that was undeveloped, in an area that was undeveloped.

I don’t know what the land loan rates were at the time but he told me he got a good deal, mainly because he had done his share of real estate transactions and so was on good terms with the banker.

Well, the area around him began to be developed. Within a few years the value of his land shot up and he was able to sell it for a handsome profit. But like I said, these things only happen if you’re astute about real estate.

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