Land Loans or Personal Loans to Buy Land

Kim Franke-Folstad

Updated November 18, 2021

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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.

There are a lot of reasons why you might want to buy a plot of land even if you aren’t ready to build on it right away.Maybe you’ve found the perfect place for a home or vacation spot, and you want to reserve it for the future. Or maybe you’ve located a just-right lot in the woods to escape to in your RV.If you want to move forward with your plan, you’ll likely need funding to make the purchase. What kind of loan you should get to buy land will depend on the cost of the land, how you plan to use it, and how large a down payment you can make. Read on to learn how using a personal loan to purchase land compares to getting a land loan, plus other options you may want to consider to help fund a land purchase.

What Is a Personal Loan?

A personal loan allows you to obtain a lump sum of money to pay for personal expenses. You then pay back those funds (plus interest) over time. Personal loans are popular because of their versatility. You can borrow a large or small amount, depending on your needs and credit score, and you can usually use a personal loan for just about anything you like.Most personal loans are “unsecured loans,” which means they don’t require you to up collateral (such as your home, car, or other asset). Instead, lenders will look at a borrower’s credit to determine if they’re eligible for this type of loan and what the terms will be. Unsecured personal loans may have higher interest rates than loans that are secured because, without collateral, lenders often view them as riskier.If you apply for a personal loan and the loan is approved, you can typically expect to get your money faster than with some other types of financing. You’ll receive the money in one lump sum — and you’ll be expected to repay the debt in fixed monthly payments within a predetermined time period.

Can You Use a Personal Loan to Buy Land?

One of the main benefits of a personal loan is that borrowers can generally use this type of loan for pretty much any personal purpose, from paying down existing debt (high credit card balances, for example, or a big medical bill) to financing a large purchase—and that includes buying land.Personal loans can also have fewer upfront costs than other types of loans for buying land, since borrowers may not have to pay for appraisals, surveys, title searches, and other closing costs. Whether a personal loan is an appropriate choice, however, may depend on how much you’ll need to borrow to purchase the plot of land you want.Personal loan amounts typically range from $1,000 to $50,000, depending on your income, existing debt, credit score, and the lender. If you aren’t in any hurry to build on the land, or if you plan to use an inexpensive structure for at least a few years, a personal loan might be enough to cover the project. However, if you expect to put a home or second home on the lot in the near future, you’ll likely need to take out an additional loan. If that’s the case, you could be looking at repaying two loans simultaneously: the personal loan for the land purchase and whatever type of financing you choose to use when you begin construction.A construction loan that transitions to a mortgage might be a better option if you’re hoping to build sooner rather than later.

Pros and Cons of Using a Personal Loan to Buy Land

Personal loans have some benefits that can make them a good option for buying land. But there are also some drawbacks. Here’s a quick summary:

Pros and Cons of Personal Loans for Land

What Is a Land Loan?

A land loan is a loan from a bank, lender, or other financial institution used to finance the purchase of a tract of land. While a personal loan can be used to finance just about anything (depending on the lender agreement), a land loan is used specifically to finance a land purchase.

How Do Land Loans Work?

A land loan works much like a traditional home loan. The borrower is typically required to come up with a down payment based on the property’s price. The property will serve as collateral for the purchase. The length of a land loan is typically longer than for a personal loan. That could be a pro or a con, depending on whether you prefer making smaller payments over a longer period or larger payments over a shorter period.

How Easy Is It to Get a Land Loan?

Though land loans have several similarities to traditional mortgages, the requirements for getting a land loan are generally much tougher. That’s because with a land loan, there’s more potential risk for the lender.If the borrower has a change of heart, it may be harder for them to sell an undeveloped piece of land than a property that already has a house. And if they can’t sell the land, it might be easier to just walk away from the loan obligation.That means you’ll probably need a better credit record to qualify for a land loan than for a mortgage, and you could face higher down payment requirements. Some land loan lenders require 20 percent to 50 percent of the purchase price for a down payment. Interest rates are typically higher, and repayment terms typically shorter, than traditional mortgages. There may be other requirements with a land loan, such as a cap on the amount of acreage.There are also fewer lenders that offer land loans than lenders that offer home mortgages — so you may have more trouble finding the competitive terms you’re looking for.

Personal Loans vs Land Loans

Several factors could go into deciding which type of loan is the best fit for your land purchase. Here’s how personal loans and land loans compare.

Types of Land Loans

If you think a land loan could be a better fit for your needs, there are a few types to consider. The current state of the land, and the purpose you have in mind for it, can dictate the terms of the loan.

Raw Land Loans

Raw land is completely undeveloped — there are no roads or utilities, not even water or a septic system going to the property. Because planning for and making these improvements can be expensive and labor-intensive, lenders tend to consider raw land a bigger risk than other types of land purchases.It can be harder to get this type of loan, and the lender likely will require a larger down payment. You may also have to pay a higher interest rate.

Raw Land vs. a Finished Lot

Purchasing a piece of raw land on which to build a home is a dream for many. But it also can be time-consuming and tougher to get financing. Here’s a breakdown of what you might be looking at when considering a raw lot vs. a finished lot.

Construction Loans

A construction loan is short-term financing that the lender pays out in installments as the building of a home progresses. Because the landowner intends to put a home on the land, a lender may consider this type of loan less risky than a loan for raw land with no plan for a build, which means the terms tend to be more favorable.Still, there’s more risk with a construction loan than a standard home loan, so a higher down payment (based on the cost of the land and estimated construction costs) may be required. Interest rates also may be higher for a construction loan than a loan for an existing home.

Improved Land Loans

Unlike raw land, improved land has access to roads, possibly sewer lines, and utilities like water and power. This step-up in usability gives the land more value, which may make it easier to get this type of loan and could make terms more favorable.

No Plans for Development?

If you’re buying a tract of land without plans to build a home or business structure on it, you may find it tougher to get a loan. However, there are several options you can explore to obtain the funding you need.In addition to taking out a personal loan (which can be used for any purpose including buying land), here are some other places to look for financing.

Shopping Local

Lenders in the area where you want to purchase might be more willing to consider a land loan than the financial institutions you usually deal with. This may be especially true if it’s a rural area or an area that’s hoping for more development. You still may have to come up with a large down payment or pay a higher interest rate, but going local may be a good way to find a lender who appreciates your vision.

Owner Financing

An eager or sympathetic seller may be willing to finance your land purchase if you can negotiate a reasonable deal. If you go this route it can be especially important to document the details, including down payment, monthly payments, and loan length. It can also be a good idea to research the property — checking the boundaries, title, zoning rules, soil samples, etc. — before signing on the dotted line.

Tapping Home Equity

If you’ve managed to build up some equity in your home, you may be able to borrow against it to fund your land purchase. The interest rates on a home equity loan could be lower because you’ll be using your home as collateral, and approval may be easier. However, if you can’t keep up with the payments on the loan, you could risk losing your home. And, if you decide to sell the home you’ve borrowed against, you’ll likely have to repay the home equity loan in full at that time.

Commercial and Specialized Lenders

Do your plans for the land include some kind of agricultural use, conservation, or recreational activity? Are you hoping to use the land for a commercial purpose? If you have something besides a home or vacation home in mind, you might be able to find a loan through a specialized lender. You can do an online search for whatever plan you have in mind for the land, whether that’s an organic farm, archery school, solar or wind farm, conservation area, or any other purpose. You may turn up local, regional, and national lenders who offer loans that are geared toward your goals.

Steps Before Applying for a Loan

Before you start looking for a loan, it can help to do some research on the property you hope to buy. Here are some factors to consider.

Finding the Right Piece of Land

If you’re getting a land loan, the lender will likely want some information about the property you hope to buy. So if you don’t have a particular property in mind, you’ll likely want to start shopping. You can do an online search for vacant lots, or you may choose to work with a real estate agent who is familiar with buying and selling land.

Knowing the Zoning and Regulations

Once you’ve found the land you love, it can be a good idea to dig into the details. What’s the asking price? Are the boundaries of the property clearly marked? Is it raw land, or are there some improvements? What properties surround the land? Do you need permission to access the land through a neighboring property?If you plan to build anything, it can also be a good idea to check out the permitting process in the area and also find out if the zoning is appropriate for what you want to do (i.e., residential, recreational, agricultural, or combined use). Your real estate agent may be able to help you with this research.

Contacting the Seller

Once you’ve done your homework and have some useful data, you can contact the seller—either directly or through an agent or attorney. The seller (or seller’s agent) may be a good source for additional information about the property and the area. But you’ll probably want to verify any information the seller provides.If you’re happy with the price and other terms of the deal, you can move forward with the purchase. You may want to ask for an exclusive buying period so you can get financing without having to worry about the owner selling to someone else.

Making a Plan for the Property

Lenders typically want to see a plan for vacant properties—and generally, the more detailed, the better. It can be wise to estimate costs and provide a realistic budget and timeline for your goals. A well-thought-out plan may help you get the loan and better loan terms.

Tips for the Land-Buying Process

Designing and building your own home — or vacation home, or organic farm, or whatever you plan to build — on a piece of vacant land can be a dream come true. But unless you've done it before, the process may become overwhelming. Here are a few things to prepare for:

Financing Can Be a Challenge

Don’t be surprised if your favorite local lender is skeptical about offering a land loan. Unless you decide to go with a personal loan, it’s a good idea to be ready to answer questions about the property and what you hope to do when you own it. If the answer is still no, you can try moving on to lenders who are more likely to understand — and support — your vision.

Being Ready for a High Down Payment

Lenders can require higher down payments for land loans — especially loans for raw land. You may have to come up with as much as 50% of the cost of the land to get a lender’s approval.

Budgeting for Additional Costs

If you throw all your money at your down payment, you could run into trouble when other expenses come up. You’ll likely need money for a title search, survey, taxes, insurance, permits, and other costs.

Getting to Know the Area

The more you know about the property you hope to buy, and the area around it, generally the better. If you don’t live in the region where the property you want is located, you may want to do plenty of online research. You may also want to rely on experts and others who can get answers about zoning, easements, flood zones, conservation protection, and other issues for you.

Working on Your Credit

Because land loans are typically considered riskier than more traditional loans, good credit will likely be important. Lenders will probably want to be sure you are responsible with your finances and have a history of making your debt payments on time.

The Takeaway

Although you might assume that land is a solid investment, lenders actually tend to see land loans as somewhat risky. As a result, the approval process for getting this type of loan can be more cumbersome than standard home loans. Lenders are often most willing to lend if you buy a finished lot or plan to build on the land you buy, since that adds value to the property. If you are planning to build, you might consider a construction loan that converts into a mortgage.If you’re not planning to build, tapping a local bank or getting a home equity loan can be good sources of funding. Other options include commercial lenders, specialized lenders, or financing from the current owner.However you intend to use the property, a personal loan can also be a good option for funding the purchase of land, since this type of loan can generally be used for any purpose.If you think a personal loan might be a good fit for your land-buying goals, you can compare loan rates today. A comparison site like Lantern by SoFi makes it easy to assess competitive loan options from a network of lenders.

Photo credit: iStock/NednapaDisclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website on credit (https://www.consumer.ftc.gov/topics/credit-and-loans)The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.SOLC1021251

About the Author

Kim Franke-Folstad

Kim Franke-Folstad is an award-winning journalist with 30 years of experience writing and editing for newspapers, magazines and websites. Her work for SoFi covers a range of topics related to personal finance, including budgeting, saving, borrowing, and investing.

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