Buying raw or undeveloped land is not an impulse decision. In order to obtain financing for the purchase, not only do you have to have a clear idea of how you will use the land -- you also must convince a relatively small pool of lenders that you have the ability to repay the loan.
Search for Raw Land Loans
Obtaining loans for raw land can be challenging compared to securing a loan for a residential home. As "story loans," land loans require you to present the history behind the property and your own plans for developing it before a bank is willing to fund the purchase. Because undeveloped land is not tied to housing as a form of collateral in the near term, banks view raw land as a particularly high-risk proposition. As a result, they expect more money up front. You can expect to dole out between 20 and 50 percent of the loan amount as a down payment.
Banks treat land loans as commercial loans, which have different interest rates, lending and repayment stipulations than do loans for a homeowner. Terms for land loans tend to be shorter than those for homes, and carry a higher interest rate.
Check with Local Credit Unions
While a bank may offer land loans, one of your best bets for getting raw land financing is through a local credit union. It should be better acquainted with the risks and potential involved in undeveloped land in the area than an outside lender would be.
As of 2015, Pikes Peak Credit Union of Colorado offers raw land loans with 60-, 84- and 120-month terms, and interest rates ranging from 5.99 to 9.74 percent. The Fort Knox Federal Credit Union of Kentucky offers financing of up to 70 percent of the appraised value of the land for a maximum of 25 acres. For either, you must undergo a credit check and include employment information for each borrower.
Seller- or Owner-financed Properties
Another financing option is to get the raw land financed by the owner or seller. In this type of financing, the seller acts as the bank and receives payments from the buyer. While the interest rates may be higher with this route, you can forgo closing costs and a credit check. The seller receives interest at a rate negotiated between the parties. Seller financing is as binding as a bank loan, and is drawn up using standard loan documents.
Obtain a Section 502 Loan
For low-income buyers, one option to finance a land purchase can be the USDA Section 502 direct loan. Basic eligibility requirements include:
- meeting income and property eligibility criteria for your locality
- occupying the property as a main residence
- selecting properties that will not be used to produce income
You can obtain funds to build and renovate a home, and prepare sites for the construction of a home. Moreover, as of 2015 these loans enjoy interest rates as low as 1 percent, with payment assistance and loan terms between 33 and 38 years.
In general, improved land or land tied to construction plans is easier to obtain loans for than is raw unimproved land. Lenders favor land held in connection with the building of a structure, because they will be paid upon the structure's securing a mortgage.