Imagine driving down a country road and seeing a “For Sale” sign nailed to a post in a field. The land is beautiful. It has rolling hills, a river, and tall trees. It’s a lucky find because you’ve always wanted to own property.
All you need to do is figure out how to finance the purchase. Personal loans can help you finance land purchases without tying up your cash. If you’re considering using a personal loan to buy land, here’s everything you need.
How To Buy Land With a Personal Loan
The first step to buying a property with a personal loan is to find a lender and apply for a loan.
Application requirements will vary from lender to lender. Still, you can generally expect to provide some personal information (your name, address, Social Security number), information about employment and income, and details about your financial history (your credit score and debt-to-income (DTI) ratio).
If the lender approves your loan application, they will hand you a personal loan agreement that outlines the loan terms, including the interest rate, monthly payment, and repayment schedule.
Be sure to read the loan agreement carefully before you sign it. After you sign it, the lender will send you the money you need to purchase the land.
Personal loan eligibility requirements
You must meet some basic eligibility requirements to qualify for a personal loan. The requirements will vary by lender but typically include:
- A good credit score: A lender’s interest rate will partially rely on your credit score. Most lenders require a credit score of 640 or higher to qualify for a personal loan. The higher your credit score is, the lower your loan interest rate.
- A steady income: Like any lender, personal loan lenders want proof of a steady income. Whether a full-time employee or self-employed, you’ll need to submit proof of income to qualify.
- A low debt-to-income (DTI) ratio: Your DTI ratio is the percentage of your gross income that goes toward paying recurring debts. Lenders use your DTI ratio to determine whether you can afford to repay the personal loan and your other bills. A DTI of 36% or less is considered ideal.
- A strong credit history: In addition to a qualifying credit score, you’ll also need a strong credit history (aka consistent on-time payments) to qualify for a personal loan.
Personal loans come in two varieties: secured and unsecured. Secured personal loans require collateral (think: a house, car, bank account, or valuable work of art), but unsecured personal loans don’t.
You can use a secured or unsecured personal loan for almost any pursuit – from consolidating debt to financing a wedding – and, of course, buying land.
When you take out a personal loan, you borrow a lump-sum amount from a lender and repay the loan over an agreed period (or term), usually 2 – 5 years. As with any loan, the amount you borrow will depend on your credit history and income. But the borrowing limits for personal loans typically range from $1,000 to $100,000.
So which type of personal loan is right for you? Well, it depends on your circumstances. Whether the loan is secured or unsecured, you should qualify for competitive interest rates if you have good credit and a low DTI.
Pros and Cons of Buying Land With a Personal Loan
The tallest hurdle you’ll need to clear with personal loans is the loan amount. Personal loans typically have smaller loan amounts than other loans.
A personal loan may not be the best option to finance a cattle ranch or an island, but they are an excellent option to finance the purchase of smaller plots of land.
There are other advantages and disadvantages to using personal loans to purchase land. And we’ll explore those in more detail.
You can get financing for your land purchase quickly. You may even get the money in a few days.
Personal loans typically have shorter terms than other loans. That means you can pay off the loan and the interest you accrue in a shorter period.
Because most personal loans have lower origination fees and prepayment penalties than other loans, they can be a more cost-effective way to finance a land purchase.
Personal loans are typically unsecured loans. You won’t need to offer collateral, like your home or car, to secure the loan.
Personal loans typically have smaller loan amounts than other loans. If you want to buy a larger property, that can be a disadvantage.
Personal loan interest rates typically start around 8% – 9%. In some cases, they can go as high as 36%. Your interest rate will depend on factors like your credit score and DTI.
The credit score requirements for personal loans are typically higher than for other loans. What score you’ll need to qualify will vary by lender, but most personal loan lenders require a score of 640 or higher.
Alternative Ways of Buying Land
If personal loans aren’t the right fit for you, there are other ways to finance a land purchase. You can take out a home equity loan, land loan, construction loan, or seller finance. The best option will depend on your building goals and personal finances.
Let’s take a detailed look at some alternative financing options.
A land loan finances the purchase of land. Land loans typically have higher interest rates and require larger down payments because they are considered riskier loans.
There are three main types of land loans:
- Raw land loan: Borrowing money to buy undeveloped land with no buildings or essential utilities. Because the ground isn’t prepped to be built on, these loans are considered high risk.
- Unimproved land loan: When there are no buildings on the land, but it’s developed for some essential utilities, the land is considered unimproved. Unimproved land loans are typically considered less risky and may have lower interest rates than raw land loans.
- Improved land loan: Improved land has been developed and has essential utilities, like roads and water lines. Lenders typically consider loans for improved land to be the safest land loans, so they often have the lowest interest rates.
A construction loan finances the construction of a new home.
You can withdraw money from the loan when necessary to pay for the land, the architect, the permit fees, and other construction-related expenses. The construction loan typically converts to a mortgage once the home is built.
If you plan on building a house on the land you purchase, a construction loan may be the right fit.
One significant advantage of using a construction loan to build a house is that you can roll the cost of the land and building costs into a single loan. That’s one loan, one closing, one monthly payment – saving you time and money. Construction loans can be challenging to qualify for and often have higher interest rates than traditional mortgage loans.
Home equity loans
You can take out a home equity loan to finance a land purchase if you’re a homeowner. Home equity loans allow you to borrow against the equity in your home.
Home equity loans often have lower interest rates than personal loans. But they’re not without risk. If you can’t make your payments, you could lose your home.
To decide whether a personal loan or home equity loan is right for you, ask yourself these questions:
- How much money do I need to borrow?
- How long will it take me to pay back the loan?
- Do I have equity in my home that I can use as collateral?
- Am I comfortable with the risks?
Your answers should help you narrow your options and decide which type of loan is right for you.
Home equity line of credit
Another option for financing land purchases is a home equity line of credit (HELOC). With a HELOC, a lender gives you a credit limit based on the equity in your home, which you can withdraw from as needed.
Many homeowners choose HELOCs because they offer more flexibility than personal loans or home equity loans. With a HELOC, you can borrow money from your line of credit in increments. And you only pay interest on the money you borrow, not the entire line of credit.
A significant difference between HELOCs and personal loans is that HELOCs typically have variable interest rates, while most personal loans have fixed rates. With a HELOC, your monthly payments could go up or down over the loan’s lifespan.
You can enter a seller financing agreement if the seller agrees to finance the land purchase. The seller holds on to the mortgage and becomes your lender. And because the seller is your lender, you will make your monthly payments to the seller.
Seller financing can be a good option if you’re having trouble qualifying for a loan from a lender. The seller may even be more open to negotiating the price because they are financing the purchase.
A USDA loan might be a good option if you plan on buying land in a rural area. The U.S. Department of Agriculture offers loans to buyers who want to buy land in areas the agency has designated as rural.
To qualify, you must meet the USDA’s income eligibility requirements. And the property must be your primary residence.
USDA loans have some significant advantages over personal loans. USDA loans often have low-interest rates. And you can finance up to 100% of the property’s purchase price.
The downside is that they can be hard to qualify for, and only a limited number of properties qualify.
Paying cash may seem like a good idea. There’s no loan to repay or interest to worry about. Buying land is a huge capital investment. Once it’s spent, it’s no longer available for other assets, retirement savings, or emergencies.
If your credit score is less than excellent, don’t worry. Just search for lenders (online lenders, credit unions, and others) who will work with borrowers with low or bad credit.
Choose the Land Financing That’s Right for You
Now that we’ve helped you navigate the ins and outs of personal loans, home equity loans, HELOCs, seller financing, and USDA loans, we know you’re better positioned to decide which loan is right for you.
But before you land on an answer, compare interest rates, monthly payments, and loan terms and conditions for each type of loan you consider. There is a loan out there that can make you the proud owner of your very own field of dreams.
The Short Version
- Personal loans, construction loans, home equity loans, HELOCs, seller financing, and USDA loans can all finance land purchases
- While personal loans may have higher interest rates than home equity loans, they're generally less risky because you're not borrowing against the equity in your home
- Seller financing can be a good option if you're having trouble qualifying for a loan from a lender
National Credit Union Administration. “Credit Union and Bank Rates 2022 Q2.” Retrieved September 2022 from https://www.ncua.gov/analysis/cuso-economic-data/credit-union-bank-rates/credit-union-and-bank-rates-2022-q2