Self Building

How to Obtain a Loan for Land Purchase (and How to Qualify)

Everything you need to know about land loans.

Updated on

January 7, 2023

Kenyan money — Loans for buying land often come with high interest rates. PHOTO | FILE

Buying land is a capital-intensive venture that often requires a prospective buyer to obtain a loan for land purchase – which is commonly known as land loan.

The rates for land loans are often higher than those of traditional mortgages as lenders see financing of vacant parcels of land as a risky investment.

Here are the three main types of land loans:

a.) Lot land loan

A lot land loan is meant to finance the purchase of land that is prepared for residential development.

To qualify for lot land loan, the property needs to have appropriate zoning, access to a public road, connection to utilities, a building permit (if required by the bank).

Lot land loans are typically accessible at a down payment of 10% to 20%.

b.) Raw land loan

These loans are available for plots that do not qualify for lot land loans. They come with high interest rates as banks consider them risky.

Lenders usually ask for a down payment of up to 50%.

c.) Seller financing

Seller financing is a type of land finance deal that allows the buyer to pay the seller in instalments instead of taking a bank loan.

Vacant land can be offered with seller financing option, particularly if the seller is eager to make a quick sale. This option is beneficial for buyers who are unable to access land loans with a conventional lender.

Before signing a seller financing deal, you should engage a lawyer to negotiate the terms of the contract, including down payment, interest rate and payment terms.

Buying land loan procedure

Here’s how to get a loan for land purchase:

The procedure of applying for a loan for land purchase is similar to that of a typical mortgage. The bank will run a credit check and appraise your financial documentation to ensure it matches what is presented on the application.

Upon approval, the money is paid to the seller and the buyer is expected to repay the loan with interest over an agreed period of time.

Due to the risk involved in financing undeveloped parcels of land, the rates for land loans are often higher than those of typical mortgages, with some lenders demanding 20% to 50% of the purchase price.

Rates for land loans

As stated above, buying land loans come with high interest rates — often starting at upwards of 5% or 6%. The rates vary depending on a borrower’s credit score and the down payment amount.