Land Loan

By: EconomyWatch Content   Date: 27 November 2009

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A land loan, as the name suggests, is a financial product intended for purchasing a land that may be meant for private or commercial use. Land loans, also known as land mortgage loans, are harder to acquire than traditional home loans because of the greater inherent risk in them.

Land Loan: Types

A land loan may be obtained for diverse purposes, from constructing an individual home to developing an apartment complex. Land loans may be broadly classified into three types, based on the scope of the land:

·        Vacant land loans: These loans are specifically intended for purchasing an undeveloped land, which has scope for establishing utility lines, such as water and electricity.

·        Improved or commercial land loans: These loans are designed for lands that have been partially improved, which are in the middle of a construction procedure. Lenders are more willing to grant such land loans, as the prospect of development is great.

·        Raw land loans: These loans are intended for buying land that has no likelihood of improvement. Such land loans are hardest to secure, and often accompany high down payments.

Land Loan: Considerations

To obtain a land loan, a borrower is required to make a down payment, which is a predetermined percentage of the land’s principal value. A down payment helps to create a built-in equity on a land loan.

Typically, a down payment on a land loan is between 20 and 40 percent, which is much greater than that of a home loan as it helps to compensate for the added risk.

Common parameters used by lenders for establishing down payments are:

Repayment capabilities: To determine a borrowers’ ability to repay a land loan, lenders review various documents. This includes personal and/or corporate balance sheets, credit history and tax returns. A strong repayment capability helps to not only lower the down payments, but also to obtain a higher land loan amount.

Collateral value: The size of a down payment can be reduced significantly or even eliminated if a borrower offers another property that has substantial equity, as collateral. Offering collateral increases the borrower’s risk, given that the collateral may be repossessed if the land loan is defaulted on.

A land loan is extremely case sensitive, as it may be affected by several other factors. So, a borrower must openly communicate the reasons for a land purchase, particularly when buying one for recreational use.


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