Unimproved land, or raw land, with no plans for improvement is the hardest type of property to secure a loan on because it is in essence a speculative investment. Raw land has no added improvements like sewers, utilities, streets or structures. A raw land loan will have higher down payment requirements and a higher interest rate than an improved property loan.

Improved property, zoned for your intended use, will be easier to get a loan for than unimproved property. Buying land with immediate plans for construction is the easiest type of land loan to secure because the lender will be paid off when you get a mortgage on the structure.

Land loans are loans made to individuals for the purpose of purchasing real estate which is land-only. This means that the real estate is not yet built upon or used for farming or industry. Land loans are risky to investors because the value of the land is not as stable as the value of improved-upon (or built on) property. Land loans are easier to obtain and have better rates when accompanied with a plan for land improvement.

Land Contract Finance
This type of financing has many of the same advantages as purchase money mortgages, such as deferral of income taxation and flexibility of terms. Its main disadvantage is that land contract cannot be resold to FNMA (Fannie Mae), although few private secondary market investors may be willing to buy contracts. Because of this situation, most lender would require at least 40%-50% on land if you do not build on it for the next 6-12 months.

The distinguishing feature of land contract is that the seller retains legal title to the property until the buyer has made all of the payments on the contract.

The land contract is made by a seller who owns the property free and clear. Such seller need only negotiate the term and interest rate of the contract, along with the amount of down payment, if any.

Looking to build on your land in a year or less? 

Purpose of land loans
Many people buy land which is not yet built upon with the intention of building their own home on the land at some future point in time. Land loans finance the purchasing of such property. Land loans may also pay to finance real estate investment land which is purchased by investors in the hope that the area will become popular and value of the land will rise.

Land loans are risky loans
Land loans are risky loans for investors because of the chance that the land will decrease in value. With a home loan, a decrease in home value is less likely and the home loan is secured by the home and the residential property on which the home sits. With land loans, there is only the land as equity and, if the land isn’t worth anything, failure to make repayment on land loans can result in costs to lenders.

Because land loans are risky loans, they often have higher interest rates than do home loans. Land loans may also require better credit. Land loans are story loans which means that the private institution funding land loans is going to have their representative learn the story behind your purchasing of the land and your intentions for development of the land. Land loans may or may not include financing for the improvement of the land.

Types of land loans
Land loans differ based on property type. Land loans are generally differentiated between raw land loans, semi-improved land loans and land loans with improvement plans. Raw land means that the land is completely unimproved without any access to sewers or electricity or any of the amenities of modern life. Raw land loans are the riskiest to the lender and the hardest to obtain by the borrower.

Improved land is land which has been built upon. Semi-improved land has relatively assured access to things like sewers and electricity. Land with improvement plans is unimproved land with a time-frame based plan for improvement which may me planned entirely by the borrower or in conjunction with community development. These types of land loans are the most common of land loans.

Repayment of land loans
Land loans are usually fifteen to twenty year loans which are repaid on a monthly basis with a calculated interest rate which may be either variable or fixed. The amount of land loans will vary dependent on land price, credit history of the borrower and amount paid in down payment. As with other loans, higher down payment on land loans results in decreased total costs of land loans. Repayment of land loans should follow the terms and conditions of the signed loan contract.