Credible takeaways
- There are multiple types of loans available for those looking to buy land, including personal loans, land loans, and construction loans.
- Land loans are good if you plan on purchasing land, but have no immediate plans to build on it.
- There are three types of land loans: raw land, unimproved land, improved land.
- You should consider a construction loan if you plan to build on the land. The repayment term is for the length of construction. After, it may convert to a traditional 15- or 30-year mortgage.
If you're looking to purchase land to build a home or commercial property, there are several potential ways to pay for it, such as taking out a personal loan, land loan, or construction loan.
Each of these has its own upsides and downsides. Personal loans, for example, are typically unsecured, so no collateral is required. Additionally, personal loans tend to have a faster approval process and time to fund than land loans, which can take up to a week or more to get your money. If you use a personal loan, however, you may not be able to borrow enough to cover the full amount, and you could pay a higher rate.
Personal loans vs. land loans vs. construction loans
There are a few types of loans that can be used to purchase land, including:
- Personal loans: Disbursed as a lump sum that can be used how you wish.
- Land loans: Designed for borrowers who want to purchase land but don’t want to build on it immediately.
- Construction loans: Available to potential homeowners who want to purchase land and immediately build a house on it.
Personal loans
Personal loans are installment loans that can be used to cover almost any personal expense. You can typically borrow $600 to $100,000 or more and have one to seven years to repay it, depending on the lender.
Keep in mind
Most personal loans are unsecured, meaning you don’t have to worry about collateral. However, because these loans are riskier for lenders, you’ll generally need good to excellent credit (a FICO score above 670) to qualify.
If you decide to take out a personal loan to buy land, be sure to consider multiple lenders to find the right loan for you.
Learn More: What Is an Unsecured Loan?
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Land loans
Land loans are specifically designed for borrowers who are purchasing land but don’t have immediate plans to build on it. There are three main types of land purchases, each of which has its own kind of land loan. These include:
- Raw land: This is land that hasn’t been developed and has no connection to the electrical grid, sewers, or roads. This kind of land can be less expensive, but the loans typically require a higher down payment (often 20% or more) and come with higher interest rates. If you’re interested in a raw land loan, be prepared to provide the lender with extensive documentation of your plans to develop the land.
- Unimproved land: This kind of land is somewhat more developed than raw land and usually has some amenities and connections to utilities. However, it generally won’t have an electric meter, natural gas meter, or phone box. Because unimproved land loans are less risky to the lender than raw land loans, they tend to have lower interest rates. However, you’ll still likely need to come up with a down payment of 20% or more as well as have a detailed plan for development.
- Improved land: This type of land is already set up with access to utilities, roads, sewers, and other major amenities, which makes it less of a risk to the lender. But keep in mind that this also makes it more expensive than raw or unimproved land. An improved land loan will typically come with a lower interest rate and require less of a down payment than other types of land loans. On the other hand, rates on these loans can be much higher than you’d pay on a traditional mortgage.
Land loans typically come with an initial repayment term of two to five years followed by a balloon payment at the end of the term. There are also some lenders that might offer longer terms if you plan to build a home on the land.
Because land loans are considered riskier than traditional mortgage loans, they can come with more stringent requirements and higher interest rates.
This means you’ll likely need to have excellent credit, a complete plan for the development of the land, and a substantial down payment.
Construction loans
A construction loan is used to purchase land, then fund the construction costs of building a new home or structure. The repayment term for a construction loan usually is only as long as the construction itself — usually 12 to 18 months. After the construction is finished, the loan may convert to a traditional 15- or 30-year mortgage.
Though construction loans are seen as less risky by lenders than land loans, they’re still more expensive than traditional mortgages. You’ll generally need good to excellent credit, a 20% down payment, and a detailed plan for the construction, including schedule and budget projections.
Also note that construction loans generally have variable rates, which means your rate could fluctuate according to market conditions.
Check Out: Personal Loan Calculator: Estimate Your Payments On a Loan
Pros and cons of a personal loan to buy land
While using a personal loan to buy land could be a good idea in some cases, it isn’t right for everyone. Here are some pros and cons to consider as you weigh your options:
Pros
- Fixed rates: Personal loans have fixed interest rates, which means your payments will stay the same throughout the life of your loan.
- Might be less expensive: A personal loan could be less expensive compared to a land or construction loan, since you don’t have to worry about a down payment.
- Fewer requirements: Unlike with land and construction loans, you don’t have to provide a detailed land development plan to take out a personal loan.
Cons
- Fewer options for bad credit: You’ll typically need good to excellent credit to get approved for a personal loan — which means it could be hard to qualify if you have poor or fair credit.
- Smaller loan amounts: You can generally borrow $600 to $100,000 or more with a personal loan, though you'll be limited by lender maximums, your credit profile, and your income. This means you might not be approved for enough to cover your expenses.
- Higher interest rates: Personal loans can come with higher interest rates compared to other funding options, such as traditional mortgages or home equity loans.
Learn More: Current Personal Loan Interest Rates
Personal loan eligibility requirements
While eligibility criteria for personal loans can vary by lender, there are a few common requirements that you’ll likely come across, including:
- Good credit: You’ll generally need good to excellent credit to qualify for a personal loan. There are also several lenders that offer personal loans for bad credit, but these loans tend to come with higher rates compared to good credit loans.
- Verifiable income: Some lenders have a minimum income requirement, while others don’t. But in either case, you’ll likely need to provide proof of income so the lender can see that you can afford to repay the loan.
- Low debt-to-income ratio (DTI): Your debt-to-income ratio is the amount you owe in monthly debt payments compared to your income. To get a personal loan, your DTI should ideally be no higher than 35% — though some lenders may require lower or allow higher.
Check Out: How to Get a Low-Interest Loan
Land financing alternatives
There are also several other potential ways to finance a land purchase. If a personal loan, land loan, or construction loan don’t seem right for you, here are a few alternatives to consider:
- Section 523 loans: These U.S. Department of Agriculture (USDA) loans can be applied for by nonprofit organizations to buy housing sites for low- and moderate-income families. Houses on these sites must then be constructed by the Self-Help method — meaning families will help build each other’s homes.
- Section 524 loans: These USDA loans are similar to Section 523 loans, but don’t have any restrictions when it comes to construction method.
- Home equity loan: If you’re a homeowner, you might be able to tap into your home’s equity with a home equity loan. Like personal loans, home equity loans are paid out as a lump sum that you can use how you wish. They also tend to have lower interest rates than personal loans. However, if you can’t keep up with your payments, you risk losing your home.
- HELOC: A home equity line of credit (HELOC) is another way for homeowners to utilize the equity in their homes. Unlike a home equity loan, a HELOC is a type of revolving credit that you can repeatedly draw on and pay off — similar to a credit card. Just remember that because your home secures the loan, you risk losing it if you can’t make your payments.
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