There can be challenges in financing your land purchase. Why you ask? The bottom line is banks don’t love dirt. Lending institutions can be surprisingly cautious when lending on raw land. A vacant property produces no income and offer very little collateral. For these reasons, lending institutions see it as a high-risk investment.

So, what does a loan look like on raw land? In order to obtain a loan on a piece of raw land, you could expect to make a large down payment, for one thing. That down payment can be as much as 35 to 50% of the cost of the land. Furthermore, the loan on a piece of land is typically not for a term of 30 years, like the mortgage on a home. The term that can be expected is typically five to 15 years. The approval process can take longer than expected also and the interest rate on the loan tends to be higher than for home loans. So, how is a buyer to make this all work if they want to purchase land? There are other options available.

Construction loan

What are options for purchasing raw land with a loan? One option, if you plan on building a home on on the property soon, is to take out your construction loan for the package of the land and home. The first draw from that loan would be to purchase the land. For the seller of the land, this would look like a cash transaction that would be able to close quickly and also not require loan approval or appraisal. If you do not plan on building on the land right away, what are other options?

Community bank

Another options is to work with a local credit union or community bank for your loan on the land. These institutions understand the regional markets better than large national banks and are more willing to take the risk on raw land. They also are often more flexible with terms on the land loans they provide.

Seller financing

An additional option is seller financing. This type of financing can streamline the process and bypass the banking process entirely. No need to have an appraisal or loan approval. This option also gives both parties room to negotiate terms that are desirable for both. Be aware that not every seller of land is able to provide seller financing. The seller must own the property free and clear of a mortgage and be willing to remain involved in the process for the agreed upon period of the seller financing.

Financing your land purchase is not as simple as financing for a home. You cannot just call up the bank that holds the mortgage on your home and ask for another loan. There are options available, but the terms on a land purchase will be different than those on a home loan. Going into the process knowing things will be different and allowing time for finalization of your financing you can be successful in getting a loan on your land purchase.