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Land loans: how financing raw land works

A land loan is credit secured by land with no finished building on it. Lenders class the land as raw, in development, under construction, or improved, and each class changes what they ask for. Your lender sets the terms, and an attorney reads the documents.

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Quick summary: This guide explains how lenders class land, what each class changes in a loan application, and which federal farm programs lend on land. It is for buyers of raw land, lots, and farm tracts. The key takeaway: the lender lends against what the land is today, so the survey, access, and wastewater answers you bring decide how the lender reads the tract.

What a land loan is

A land loan is credit secured by land that has no finished building on it, or by farm or timber land. It differs from a home mortgage because the collateral produces no rent and holds no house.

Federal bank guidelines treat the classes differently. The interagency real estate lending guidelines set a lower loan-to-value ceiling for raw land than for any other real estate class. A bank’s own limits sit at or below those ceilings.

How lenders class land

Lenders class land by what the loan pays for and what stands on the ground. The federal guidelines name these classes and set a supervisory ceiling for each.

Class What the class covers Supervisory loan-to-value ceiling
Raw land Land financed as it sits, before development work 65 percent
Land development Credit to improve unimproved land before buildings go up, such as sewers, water pipes, utility cables, and streets 75 percent
Construction, 1- to 4-family Credit to erect homes, including the infrastructure they need 85 percent
Construction, other Credit to erect commercial, multifamily, or other buildings 80 percent
Improved property Includes farmland, ranchland, or timberland committed to ongoing management and agricultural production 85 percent

Three points from the same guidelines shape the loan:

  • Ceilings, not offers. The figures cap a bank’s internal limits. A bank may set lower limits, and it may make documented exceptions.
  • The final phase sets the class. A loan that funds both the lot and the house uses the limit for the final phase it funds.
  • Value is the lower number. On a purchase, value means the lesser of the price you pay and the appraised value.

A working farm can fall in the improved property class, not the raw land class. Ask your lender how it classes your tract.

What each class changes in the application

Each class changes the evidence the lender wants to see.

  • Raw land. Expect questions about what you plan to do with the land and when. The lender reads the tract as it stands today.
  • Land development. Expect the lender to ask for the preliminary plat, engineering plans, and a cost budget for streets and utilities.
  • Construction. Expect plans, a builder’s contract, a budget, and the permits for the house or building.
  • Farm. Expect a farm business plan and your production and financial history.

Watch for: A tract with no recorded access or no wastewater answer reads as raw land, whatever your plan for it. Settle those two questions before you apply.

What the lender asks for

Most land lenders ask for the same core documents, and each one answers a question about the collateral.

  1. A survey. A licensed land surveyor confirms the boundaries, the acreage, and any encroachments.
  2. An appraisal. An appraiser estimates market value. See Land appraisal: how an appraiser values vacant land.
  3. Legal access. The deed, plat, or a recorded easement shows a right to reach a public road. A new entrance on a state road needs a permit. See NCDOT driveway permit: how access to a state road works.
  4. A wastewater answer. Where no public sewer serves the land, state law requires an improvement permit before a residence is built. See Perc test: what it is and what it costs.
  5. A zoning letter. Planning staff confirm the district and whether the use is allowed. See Who regulates a property in North Carolina.
  6. Title insurance. A North Carolina attorney examines title, and the lender requires a policy that protects its lien.

USDA farm ownership loans

The USDA Farm Service Agency makes loans to buy and improve farmland, and it backs loans that other lenders make. The program page lists four forms:

  • Direct loans from the agency, listed at up to 600,000 dollars.
  • Backed loans made by a commercial lender, with the agency carrying part of the lender’s risk, listed at up to 2,558,000 dollars.
  • A down payment program for beginning farmers and ranchers, which lists a 5 percent down payment.
  • Joint financing with another lender, with the agency covering up to 50 percent of the purchase cost.

The page lists repayment terms of up to 40 years for real estate. Applicants must be U.S. citizens or permanent residents, show farm management education, training, or experience, and show the ability to repay. You apply at the local FSA office with a financial history and a farm business plan. Program figures change, so confirm them with that office.

The Farm Credit System

The Farm Credit System is a network of borrower-owned lenders created by Congress in 1916. It has 4 banks and 55 associations, and the associations lend to farmers, ranchers, and other eligible borrowers. Its authorities include agricultural real estate loans and rural home mortgages, subject to eligibility conditions.

Each System institution is a cooperative owned and controlled by the farmers who borrow from it. The Farm Credit Administration regulates the System under the Farm Credit Act of 1971. Ask a System association whether your tract and your use make you an eligible borrower.

Take action: Before you apply, find out what the record says about the tract’s access, zoning, and wastewater. Start with Acreage that holds up after the survey.

Other ways to pay for land

A bank or farm lender is one path. A seller can also carry the note, secured by a deed of trust on the land. See Owner financing land: how a seller carries the note. A seller can instead keep title until the last payment. See Land contract: how an installment sale of land works.

Each path changes who holds title and what happens on default. A North Carolina real estate attorney explains the difference before you sign. For the full buying sequence, see How to buy land.

Key recap

  • Lenders class land as raw, in development, under construction, or improved, and each class carries a different federal supervisory ceiling.
  • Raw land carries the lowest ceiling in the federal guidelines, and a working farm can count as improved property.
  • On a purchase, the lender’s value is the lesser of the price and the appraised value.
  • Lenders ask for a survey, an appraisal, legal access, a wastewater answer, a zoning letter, and title insurance.
  • The USDA Farm Service Agency and the Farm Credit System lend on farmland to eligible borrowers.

Questions

Is it hard to get a loan for raw land?

It is harder than a home mortgage. The federal guidelines give raw land the lowest loan-to-value ceiling of any real estate class, so expect the lender to ask for more equity and more documents. Your lender gives the exact terms.

Can I use a farm loan to buy land?

Yes, if you qualify. The USDA Farm Service Agency makes farm ownership loans to buy farmland, and Farm Credit System associations make agricultural real estate loans to eligible borrowers.

What does a lender need to see before a land loan?

A survey, an appraisal, proof of legal access, a wastewater answer where no sewer serves the land, a zoning letter, and title insurance. Some lenders also ask for your plans and a budget.

References

Primary sources cited on this page, in APA style.

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