A land loan is a financing option that is meant to be used just for the purchase of land. Loans of this type, often referred to as land mortgage loans, are somewhat harder to get than more traditional real estate loans, which include not only the land, but also the developed property. Many different factors can go into an approval for a land loan, including future plans, and the down payment.
Like any type of loan, in order to make the investment attractive to a lender, there must be a reasonable assurance there will be a return on the investment. Thus, those who are interested in developing the land will be considered less of a risk than those who want to keep the land undeveloped. Undeveloped land is easier for an owner to walk away from, considering there is nothing on the land that ties the owner to it financially, other than the land loan itself.
Therefore, it is likely that anyone seeking a land loan may be asked what they are planning to use the land for. If the land is tied to income, as in the case of farm land loans, the risk will be seen as smaller. Those who want the land for recreational use, such as for equestrian activities, hunting or fishing may be required to take additional measures so that the lender will feel comfortable making the loan.
In most cases, a down payment for undeveloped land will likely be more substantial than a down payment for land that is already developed, or which is in the process of being developed. Some lenders may require as much as 50%, though 20% is more of an industry standard. This type of a down payment means the land loan already has built-in equity. This down payment is in direct contrast to what is normally required for a home, or a piece of otherwise developed land. In some cases, loans on developed land, especially private homes, may be granted with no money down.
For those who already have developed land paid off, or who have built up substantial equity in developed land, that property may be used as collateral for an undeveloped property. This will reduce the down payment required for an undeveloped land loan and could be a good benefit for the borrower. This will, however, put at risk a piece of land that the owner has more invested in, and may even use as a primary source of income or residence.
