All homesteads, regardless of our plans for them, have at least one necessary thing in common: land. Homesteads are not possible without first having land to grow, improve, compost, harvest, farm, live, and do everything else on!
Unfortunately, land isn’t cheap these days, so it can be quite the process to purchase the land of your preferred size and composition in your desired location.
For most of us, this process involves taking out a loan to finance either a home with acreage or a piece of vacant land. In either case, a land loan may, and in many cases will, be necessary.
Land loans are notoriously hard to find information about. Banks and credit unions tend to keep extremely limited information (if any at all!) on their websites about financing options and the processes for obtaining these somewhat uncommon loans.
So, we’ve put together everything we know (and have experienced ourselves!) about getting a land loan in this one comprehensive article.
Below you’ll find information about land loans, tips and tricks on how to approach institutions, and helpful things to look out for so you’re prepared to begin searching for that perfect property!
Not sure you want to homestead yet? Learn how to try it out before you commit with these tips from How to Start Homesteading Before You Have A Homestead.
What is a Land Loan?
A land loan, also referred to as a recreational loan, is a loan from an institution used to finance a piece of vacant land. Aditionally, the land may have a small structure on it – usually a rustic cabin or hunting camp (more on that later).
Most commonly, people apply for land loans when buying a hunting/recreational property or timber holding that they will keep for future harvests. However, sometimes land loans are used to finance a property that will be used as a year-round residence. This is necessary when a year-round home/property does not meet the qualifications of a traditional mortgage.
We’ll get to what qualifies and disqualifies a property from a traditional mortgage in a little bit, but first there is one very important thing you need to remember during your land search.
A house or liveable structure on a property does not automatically qualify it for a traditional mortgage OR mortgage-length terms.
In fact, because homesteaders tend to seek out non-traditional homes, large acreage parcels, and agricultural land, they’re more likely to be disqualified from getting a traditional mortgage.
What is the Difference Between A Mortgage and A Land Loan?
A traditional mortgage is a fixed-rate loan that is usually repaid over 15 or 30 years. Required down payments vary based on what kind of mortgage you are applying for and generally go as low as 3%. Interest rates can also dip below 3% with good credit (as of Feb. 2021).
There are two types of mortgages out there: government-backed and conventional.
Government-backed loans are insured by the federal government through three agencies: the Federal Housing Administration (FHA), the US Department of Agriculture (USDA), and the Department of Veteran Affairs (VA). To find out more about these, read this helpful article.
Conventional mortgages are more popular and accessible than government-backed mortgages. Fannie Mae and Freddie Mac, which are government-sponsored enterprises but not government agencies, set conforming rules for conventional loans. The two may also purchase and guarantee loans that meet their standards through a secondary market.
That’s great and all, but what does this mean for you, the consumer?
The bottom line is: to get a traditional mortgage, the property you’re financing has to meet the qualifications set by either the government or Fannie Mae/Freddie Mac.
In contrast, land loans have much less favorable terms because they are deemed “riskier” than conventional mortgages. Basically, undeveloped and off-grid properties are considered harder to sell or liquidate if you default on your loan, making them a higher risk for institutions to take on.
Below are the most common terms for land loans that we found through experience contacting over 20 banks and credit unions in 2 different states:
[Please note, each institution has their own rates and terms for land loans and a lot hinges on credit scores as well as debt-to-income ratios so please do your own research!]
- Required down payment of 20%
- Interest rates ranging from ~6 to 12%
- Payback length of 7-15 years
While these were the most common, we also came across some outliers. One credit union offered 0% down on any qualifying land in a particular county, but the approval amount was much lower than other institutions.
Another bank required 30% down with a very high interest rate. One credit union offered us a 30-year payback length after they found out we were intending to use a potential property as our primary residence. Another thing to note on this last point is: despite a land loan being acquired for your primary residence, not all banks take this at face value. They assume that you are buying it as a recreational or otherwise secondary property and treat it like that from a financing standpoint regardless of what you state your purpose for acquisition as being.
One of the most popular loans we heard about for land was a balloon loan amortized over 15 years. This is a confusing concept that we’re still not sure we fully understand, so take the following explaination with a grain of salt and definitely do your own research if this is an option you’re seriously considering!
The gist of it is you take out a short-term loan, say 5 years, for the whole amount you’re financing. However, your monthly payments are as if the loan is over 15 years. After 5 years, you either must refinance (which could produce a better or worse interest rate than what you had), or owe the remaining balance of the loan aka the “balloon payment”. Refinancing would happen every 5 years until your loan is paid off. Note that refinancing does incur a cost and could be thousands every time you have to do so. Many homesteaders are on a tight budget for a substantial or indefinite period after land acquisition and this can be a crippling expense to those who are unaware.
No one at any institution offering the balloon loans had an explanation as to why their land loans are set up this way. It doesn’t seem to have any apparent advantages for the consumer over a regular 15-year loan, and indeed involves more administrative-type work.
For more information, check out this helpful article from Investopedia, and definitely talk to a bank or credit union representative.
What Qualifies A Property For A Conventional Mortgage?
Depending on who you talk to, you might hear varying answers regarding what qualifies for a conventional mortgage. Most institutions follow the qualifications set by Fannie Mae and Freddie Mac for mortgages, but may have their own additional restrictions also.
In order to qualify for a conventional mortgage, a property must have one, multiple, or all of the following conditions:
- Have a liveable home
“Liveable” is definitely a subjective term, but lenders most likely have their own definition. If you think a home you’re interested in might be deemed “non-liveable,” ask your lender. Here’s a helpful article on financing homes that need structural repairs. ALSO, it’s important to note that some lenders will not finance mobile homes. Since many remote and off-grid properties have mobile homes, make sure to bring this up as well. We also found that permanent foundation types, such as a concrete slab, were required and that structures on cinder blocks, wood supports, or other forms of “unattached” bases did not qualify for conventional mortgages.
- Be serviceable by public utilities
Off-grid homes that do not have access to public utilities do not qualify. Public utilities being things such as gas pipelines, electric powerlines, etc. Basically, this means that you can finance a home with a conventional mortgage that has existing electricity and/or other utility lines and convert it to off-grid later by choice. However, you can’t finance an off-grid home without these available utilities with a traditional mortgage.
- Be residential in nature
This regards zoning and the main intended use of your property.
Plus, there are extra regulations regarding land size and usage, which you can look more into here.
Talking to lenders about your specific situation is the best way to find out what you may or may not qualify for.
Important Things To Know About Getting A Land Loan
1. Apply for prequalification or preapproval early in your land searching process.
If you’re dependent on financing to purchase land (which, if you’re reading this article, I’m assuming you are!), find an institution early on with terms to your liking, and apply for pre-approval. Even if you don’t plan on buying right away, it’s still extremely beneficial to have an amount in mind when searching for properties.
When we started looking for land, we were originally approved for around what we expected. However, throughout the process of land searching and talking to different financial institutions, we: sold our house, grew our savings significantly, had promotions and job changes, and moved into a cheaper rental. All of these factors impacted our pre-approval amount in a positive way, and now we are approved for much more than we were just 6 months ago.
I say all of this because there are many factors that go into a pre-approval. And although they are always subject to change, it’s important to have a realistic starting point for your budget.
2. Local credit unions have the most favorable loan terms.
Credit unions are your friend when it comes to land loans. Big-name banks simply don’t offer favorable loan terms for land. Their required down payments are usually more than 20% (50% or more, we found), and their interest rates are significantly higher than any credit union we’ve talked to.
However, I urge you not to take my word for it! We only called a couple banks, and found that they weren’t worth pursuing in the Northeast or Midwest, but other locations in the US may have different offers.
As I said, we certainly got the best rates and terms with credit unions. In our experience and research, the more localized the institution, the better the financing they are willing to offer. Additionally, localized city or county credit unions will know their specific area much better than credit unions covering a broad geographical area. They will most likely have a good understanding of what land appraises for, and if there are any specific requirements needed in order for financing to go through.
When calling credit unions, it is imperative to find out what geographical areas they service. Most credit unions require you to reside, work, attend school, worship, or have a relative in a certain area in order to do business with them. Additionally, they usually only finance properties located within the counties or areas they service. If you are unsure where your final property will be geographically, it might be a good idea to be in contact with 2 or 3 credit unions to cover all your geographical bases while searching.
3. Shop around – every lender in every area is different.
I cannot stress this enough – shop around, shop around, shop around. As I’ve said several times so far, terms and offers can vary significantly by institution. This even applies to credit unions in the same town.
Call several credit unions and banks, and if you have an online lender in mind, ask them as well! Most institutions do not have land loan information posted on their websites, so it is imperative that you get someone on the phone.
4. Most financial institutions require a 20% (or more) down payment.
This is extremely important to be aware of!! Unfortunately, a significant amount of cash is required upfront to finance land. This may force many to extend their purchasing timeline in order to build up a bigger cash reserve, go smaller in parcel size than expected to keep cost within reach, or reconsider land loans altogether.
Depending on what kind of financial situation you’re in, this might require a reworking of your budget. Even if you have good credit and qualify for a high dollar amount to be financed, your financing will not go through without the required down payment.
Some credit unions may offer financing with a down payment lower than 20%, however these are few and far between. In our interactions with many institutions across multiple states, we only found one credit union that offered a special 0% down for land loans that qualified in a specific county. Other than that, 20% is both the lowest and most popular percentage down we’ve come across, although some require even more than 20% down.
5. The most important factors in your approval are income to debt ratio and credit score.
This is similar to any other loan – your monthly debt-to-income ratio and credit score are the bread and butter to your pre-approval amount. If you are purchasing land with a partner, it may benefit you to run several different scenarios to see who gets approved for the most.
For instance, when we were looking for land, I had an incredibly high balance left on my student loans. My monthly debt-to-income ratio significantly lowered our pre-approval amount compared to when my partner applied on his own, even though we both had excellent credit.
Additionally, although your monthly debt-to-income ratio and credit score will be the same or similar at any institution you apply to, approval amounts can vary drastically. If the pre-approval amount is lower than you were hoping for, ask what the most detrimental factors in the decision were and how they can be improved. You would be surprised at how fast it can get turned around.
Note: don’t plan on making any big purchases that will result in additional debt during your land search. This will come back to haunt you if it raises your debt-to-income ratio enough to drag down your pre-approval amount and put a previously affordable property out of reach. If you absolutely must take on debt during the process, try to go for the lowest monthly payment option (even if it isn’t the most affordable in the long run, and yes, I shudder to say that), as many banks are more concerned about the monthly debt obligation amount than overall debt obligation amount. The point is though, avoid any additional, voluntary debt accumulation altogether.
6. A structure on the land does not automatically qualify it for a traditional mortgage.
Read that again. Memorize it. Adjust your expectations before you start searching.
As explained earlier, there are strict criteria needed to meet the qualifications of a conventional mortgage. If you’re like us, our wants didn’t meet any of them! Our goals for purchasing land was to get as far away from neighboring people as possible, no matter the sacrifices in conveniences, with as much acreage as possible within our budget.
7. Some institutions have better financing options for people who are planning to build within a certain amount of time after purchase.
There are construction loans that you can use to buy land, as well as land loans that convert into a mortgage when the house is built within 3-5 years. These options are more suited for people who already have house plans and know what they want and how much it will cost to build. My partner and I did not look too much into these loans because land was more important to us. The type of house we build is highly dependent on how much the land will end up costing, so we don’t have any plans yet.
8. Intention of use for your property doesn’t matter 99% of the time.
If the land you’re inquiring about qualifies for a recreational loan and not a mortgage, usually the bank or credit union won’t care if you plan on using it as a full-time residence – you will still get the recreational loan terms. We ran into one exception – see #9 for an explanation.
9. Ask about in-house loan rates. You may qualify for more favorable term if you plan to use land or structure as your primary residence.
Even though most institutions did not care that we planned to use the land for a primary residence, we still made known our plans in case it was a factor. After finding this out, one institution offered us a 30-year in-house loan! They still required a 20% down payment, but we were able to look at higher-priced properties after finding this out, because of the significantly lower monthly payments the terms would give us. It never hurts to ask – in fact, it almost usually only pays off.
10. Before committing to an institution, ask if any problems might come up due to buying remote land.
Some institutions deal with more remote or large-acreage parcels than others, meaning they’re much more prepared to help your purchase go smoothly. We talked to several credit unions that warned us they might have trouble finding an appraiser who has experience with both appraising remote properties and who would be willing to visit the land we were interested in. Some people just don’t want to drive a couple hours away, especially when so many people are refinancing primary residences right now so appraisers have a lot of local demand. Yes, the banks said they would still find one eventually, but it probably wouldn’t be one of the go-to trusted people that they have confidence in to do an accurate appraisal.
11. Patience is key.
Patience really is key when buying land. Not only in the land loan process, but during your search too. If you have very specific wants or needs, it will probably take quite a while to find exactly what you’re looking for, which has been the case for us.
And there you go! Real information on land loans from people who have spent a lot of time, energy, and frustration figuring them out. Good luck with your search!