Land Loans Explained: What They Are and How They Work

So, you’ve found a piece of land that feels like the perfect foundation for your future. It might be a quiet lot in the Hill Country, a plot near a growing Austin suburb, or a parcel of rural land with plenty of space to spread out. 

But before you break ground, you need to figure out how to pay for it. For most buyers, that means exploring a land loan. If you’ve never purchased raw land before, the process is probably unfamiliar. A land loan works differently than a traditional mortgage, and knowing what to expect before you apply can make the whole experience much less stressful.

“Buying land gives you the opportunity to start with a blank slate and really think about what you want to create,” says Terra Vo, Mortgage Loan Originator here at Amplify Credit Union. “But the financing can look a little different than what buyers are used to with a traditional home purchase. It helps to understand your options before you start seriously shopping.”

Here’s a straightforward breakdown of what a land loan is, the types of land loans available, how land loans work in practice, and what you’ll need to qualify.

What is a land loan?

A land loan is exactly what it sounds like: a loan used specifically to purchase land instead of an existing home. While a traditional mortgage covers a home and the property it sits on, a land loan finances the land itself, whether or not there’s a structure on it.

Lenders consider land to be a riskier investment than a finished home because there’s no structure to serve as collateral. Because of that, land loans typically require a larger down payment and come with higher interest rates than a conventional home mortgage. That said, for buyers who are planning to build or simply want to secure a piece of property before prices climb higher, a land loan can be an excellent tool.

Types of Land Loans

Not all land is created equal, and neither are land loans. Lenders generally categorize land into three buckets, and the type of land you’re buying will determine which loan product fits best. 

Here’s a look at the main types of land loans:

• Raw land loans: Raw land is undeveloped land with no utilities, roads, or infrastructure in place. Because it’s the furthest from being “ready to build,” raw land loans are considered the highest risk by lenders. As a result, they often come with the steepest interest rates and require the most substantial down payment—sometimes 30 to 50 percent of the purchase price.
• Unimproved land loans: Unimproved land is a step up from raw land. This land may have some utilities nearby or partial infrastructure, but it still lacks full development. Loan terms for unimproved land are slightly more favorable than raw land, but lenders will still want to see a solid plan for the property before moving forward.
• Improved land loans: Improved land has access to roads, utilities, and other infrastructure—making it the most lender-friendly of the three. If you’re planning to build a home on a lot that already has what it needs to support construction, you’ll likely find the most competitive rates and terms available for land purchases.

“From a lending perspective, the more development that’s already in place, the fewer unknowns there tend to be,” Vo says. “A property with road access and utilities already set up is very different from a completely undeveloped parcel where the buyer still has to figure out how all of those pieces will come together.”

How do land loans work?

The mechanics of a land loan are similar to other types of financing in some ways, but there are a few important differences to keep in mind as you navigate the land loan application process.

The Application Process

When you submit a land loan application, your lender will evaluate several factors to determine whether you qualify and what loan amount you’re eligible for. These include your credit score, income, debt-to-income ratio, and the details of the land you’re hoping to purchase. 

You’ll also need to have a clear plan for the property. Lenders feel more confident when they understand how you intend to use the land, especially if you’re planning to build in the near future.

Down Payment and Interest Rates

As mentioned above, land loans typically require a larger down payment than a traditional mortgage. Depending on the type of land and the lender, you could be looking at anywhere from 20 to 50 percent down. Interest rates also tend to run higher, reflecting the elevated risk the lender takes on when there’s no finished home securing the loan.

Loan Terms

Land loan terms are generally shorter than those for a standard home mortgage. While a traditional mortgage might stretch over 30 years, land loan terms are often shorter. It’s worth discussing long-term financing goals with your lender upfront, since many buyers eventually refinance a land loan into a construction loan or permanent mortgage once building begins.

Land Loan Requirements: What You’ll Need to Qualify

If you’re wondering what qualifies for a land loan, the short answer is: it depends on the lender and the type of land. That said, here are the common requirements you can expect to encounter:

• Strong credit score: Most lenders look for a credit score of at least 680, though higher is always better when it comes to securing favorable rates. If your credit score needs some work, it’s worth taking steps to improve it before submitting your land loan application.
• Substantial down payment: Be prepared to put more down than you would for a traditional home purchase. Having a larger down payment ready signals to lenders that you’re financially committed to the land purchase.
• Stable income and low debt: Lenders will want to confirm that you have the financial stability to make consistent loan payments. A healthy debt-to-income ratio goes a long way here.
• A clear plan for the land: This is especially important. Lenders want to understand your intentions—are you planning to build a home, hold the land as an investment, or develop it commercially? The clearer your plan, the more confident your lender will be.
• A property appraisal and survey: Your lender will likely require an appraisal of the land to confirm its value relative to the purchase price, as well as a survey to verify boundaries and any easements.

“There isn’t necessarily one perfect profile every land buyer has to fit,” Vo says. “We’re looking at the overall picture, including your finances, the property itself, and what you want to accomplish. That’s why talking to a lender early can be helpful, especially before you get too far into a particular land purchase.”

Land Loans vs. Construction Loans: The Difference

One question that comes up often: if you’re planning to build a home on the land you’re purchasing, should you get a land loan or a construction loan? The answer depends on your timeline.

A land loan is used purely for the land purchase itself. If you’re not yet ready to build—maybe you want to secure the property first while you finalize your plans or save up more capital—a land loan is the right starting point. Once you’re ready to break ground, you’d then apply for a construction loan, which covers the cost of building the structure. Some lenders offer combined land-and-construction loan products that roll both steps into one, which can simplify the process significantly.

Ready to take the next step?

Buying land is an exciting step, whether you’re dreaming of building your forever home, making a smart long-term investment, or planting roots in a community you love. And like any big financial decision, it’s a lot easier when you have the right partner by your side.

Amplify Credit Union offers land loans designed to help members in Austin and the surrounding areas secure the property they’ve been looking for. Our team is here to walk you through your options, explain how the application process works, and help you find a loan that fits both your goals and your budget.