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Basic Info On Land Loans & Farm Credits: What They Are And How To Finance Them

Buying physical land can be a confusing process. Not only is it challenging to find an agent that offers land loans, application requirements vary greatly between states and financial institutions.

Land Loan & Farm Credit FAQs 

Although finding a suitable land loan can be challenging, investors have more options at their disposal. Whether you’re interested in property development, agriculture, or an alternative investment, there are more ways to secure land loans and Farm Credits. Both of these financial tools can help everyone finance their dream plot of land. 

What Is A Land Loan?

Land loans are financial agreements that help people borrow money to purchase land lots or acres. Investors could use land loans to buy raw land, undeveloped land, or improved land for various purposes. A few common reasons people look into land loans include agriculture & plant cultivation, livestock, and property development.

Although land loans work similarly to traditional mortgage loans, they aren’t as easy to find or finance. Land loans are considered a “high-risk” investment versus mortgage loans because there’s less collateral risk on the borrower’s side. Since there aren’t developed properties on the land that borrowers are purchasing, loan issuers can’t seize a house as they would with a standard mortgage. Therefore, firms or brokers that offer land loans will ask for a higher down payment and charge steeper interest rates. People who take out these loans also need a higher-than-average credit score. 

What Is A Farm Credit?

In the USA, “farm credit” refers to any financial service through the Farm Credit System (FCS). Initially called the Federal Land Bank System (FLB) in 1916, the FCS is a nationwide organization that focuses on helping individuals and companies involved in agriculture. Congress changed the name of the FLB to the FCS in the 1950s, and the federal government initially helped fund this organization. In recent years, the FCS solely relies on debt securities rather than federal funding. 

Today, there are over 70 banks, credit unions, and other financial providers involved in the FCS. Unlike most national banks, FCS members are willing to take on the risks of loaning money to the agricultural sector. FCS banks also tend to offer more competitive interest rates to borrowers. 

While the FCS can help finance land loans, farmers could request funds for dozens of other agriculture-related investments. For instance, the FCS could provide loans to help businesses expand their cultivation operations or update farming equipment. Anyone could request Farm Credits on the FCS’s official website:

What Are The Main Types Of Land Loans? 

Land loans can fall into one of three categories: raw, undeveloped, or improved. Unsurprisingly, these terms refer to the current state of a land parcel (i.e., how developed it already is). Since loan issuers can’t use pre-built properties as collateral, they rely on the quality of the land to determine the value and risk profile of borrowed funds. 

As its name suggests, “raw land” loans are for regions without access to essential services like utilities, septic systems, or paved roads. Since raw land is a “blank slate,” they are most attractive to people who want to build a home from scratch or use their land for farming, livestock, or another business venture. Although the primary cost for raw land may be cheaper than other loans, banks tend to require higher initial deposits and interest payments. Loan buyers also need to provide detailed info on how they plan to use their raw land before getting this loan. 

Undeveloped land loans are similar to raw land loans, but these areas will have more resources for prospective landowners. While every situation is different, most undeveloped land plots already have access to essentials like utilities and water. Since there’s already some “value” in undeveloped land acres, loan issuers tend to view them as “less risky” versus raw land. While an undeveloped land loan may cost more than a raw land loan, they typically have lower interest rates and down payments.

Thirdly, improved land loans are for areas with features like electricity, a septic system, and access to roads. Of these categories, improved land loans most closely resemble traditional mortgage loans. Down payments and interest rates are still higher for improved land loans versus mortgages, but the payment plans are typically more flexible than for raw or undeveloped land. Indeed, it’s common for investors to use “construction loans” to build properties on improved land. Construction loans are special short-term land loans ideal for people with a clear building plan who want to start developing immediately. 

There are dozens of land loan types people could add to their raw, undeveloped, or improved land loans, but a few of the most common are as follows:

  • Land contract loan: Most often, land buyers draw up a contract specifying their ownership rights to a land parcel. The loan issuer will hold this contract as collateral until it receives all the interest payments from the borrower. 
  • Land equity loan: Unlike land contract loans, land equity loans value physical land similar to tradable shares like REITs. In this case, the equity stake in the land property serves as collateral. 
  • Residential bridge loans: If you already own another land development, you could consider a residential bridge loan to purchase a second property. With this loan, you can acquire a new land parcel by using the property you already own as collateral. 
  • Land improvement loan: These loans are solely focused on enhancing the quality of your land. For instance, you could use these loans to improve irrigation systems, create reservoirs, or pave roads. 

How Do Land Loans Work?

The process of buying and paying for a land loan is very similar to taking out a mortgage. After depositing a down payment, new landowners need to continue paying off their loans with interest. The big difference between mortgages and land loans is that the latter has a higher risk profile. This greater risk usually translates to elevated interest rates, a shorter repayment term, and a 20% minimum down payment. 

In addition to regular payments plus interest, people who take out a loan may need to pay special fees such as title insurance or a survey fee, depending on the land they purchase. If a borrower can’t make their minimum payments on time, the loan issuer can legally seize the land contract.

How Do I Qualify For A Farm Credit Or Land Loan?

Since land loans carry a higher risk, borrowers must demonstrate strong financials. Most often, people with credit scores below 700 and debt-to-income ratios below 40% won’t qualify for a land loan. In addition to high creditworthiness, successful loan applicants must have a clear plan for how they intend to use their new property. Loan issuers need to feel confident new landowners have the resources to achieve their goals. 

How Do People Apply For Land Loans?

First, land loan applicants must establish why they want to buy land. While this may seem obvious, investors need to have a clear goal and strategy for whatever land they’re interested in. Loan issuers always feel more comfortable if they see a detailed plan for land development. 

After you’ve written down your land improvement objectives, you’ll need to search for available land in your area. At this stage, many people enlist the help of a land broker who’s familiar with local territories. A professional land broker can provide you with info on land parcels that fit your desired goals and budget.

Investors should compare loan prices, interest rates, and extra fees at credit unions, banks, and other financial institutions. It can take a week or two to determine the best land loan for your needs. 

Lastly, you’ll need to submit all relevant financial and personal documentation to your loan issuer. Once your bank reviews your info, they could either approve or deny your loan application. If you’re successful, you’ll need to put a down payment on your loan and continue to make monthly payments plus interest. 

Do Land Loans Carry Extra Fees?

Since every lender has different terms and conditions, there are no “standard fees” for land loans. However, most of these loans carry the following fees:

  • Origination fee
  • Appraisal fee
  • Survey fee
  • Title search fee
  • Closing fee

People interested in land loans need to ask for a complete list of fees from their issuer to develop an actionable financing schedule.

Do Land Loans Have A Credit Score Requirement?

The average credit requirement for a land loan is always higher than traditional loans like mortgages. While there’s no “standard” rate for a land loan, borrowers should strive to maintain a score of approximately 700 for the best odds of success. 

How Long Do Borrowers Have To Wait For A Land Loan Approval?

It usually takes a few weeks to approve a land loan. However, if your loan issuer has a fast turnaround time and you provide all of the necessary info in a timely fashion, it may only take a few days to get your land loan.