You can get a loan for bare land, but lending restrictions are much tighter than for developed plots of land. Many major banks offer few loan options for raw land. In many instances you may have to turn to a credit union or a smaller bank to obtain financing.
When you take out a secured loan, the stronger the collateral, the better the loan terms. Lenders believe that people are less likely to default on mortgages secured to their primary residence than loans secured by other types of collateral. Therefore, interest rates are lower on home mortgages than on rental homes or lot loans. In the realm of lot loans, developed lots are areas with road, sewage and water access that are construction ready. Raw lots have no access to basic amenities and may sit in rural areas that are subject to being rezoned. Therefore, raw land has less resale value than other types of collateral. Risk-averse lenders seldom write raw land loans.
A plot of bare or undeveloped land may lose value if plots around it are rezoned for commercial or agricultural use. This is because you are less likely to build a home in the middle of a farming area than in a residential neighborhood. To safeguard against lots losing value, lenders typically require you to make a significant down payment. Depending on your bank, the down payment can range from 20 percent to 50 percent. Therefore, if you lack the cash for the down payment, you cannot finance the land.
In addition to large down payments, banks also mitigate risk by charging high interest rates. If a lot loan exposes a bank to twice as much risk as a home loan, then the bank can balance out that risk by charging twice the home loan interest rate. Additionally, home loans have terms of up to 30 years where land loans often have terms of just 10 years or 15 years. Short terms coupled with high interest rates result in large monthly payments. Therefore, you need to have a high income level to qualify for these loans.
Local Versus National
Credit unions are not-for-profit entities which do not have to factor profits into the equation when underwriting loans. Consequently, credit unions are more likely to write lot loans than banks.
Small regional banks are more likely than major banks to write lot loans because decision makers at small banks have more insight into the local market. Additionally, banks must treat customers equally, so if a national bank gives you a lot loan, it has to give lot loans to all the other qualified buyers in its market area. Small banks have a smaller market share and are therefore less likely to get overwhelmed with applications for high risk loans in the same way that big banks may.