Using A Personal Loan To Buy Land: The Pros, The Cons And The Process

Buying a plot of land can bring about many possibilities. You could build a new house on the land, use it for a mobile home or do almost anything else with it that your heart desires. Land can be expensive, though, and you may need a loan to fund all or most of your purchase.

A personal loan is an option worth possibly exploring when you’re buying land, and it actually has a few benefits that other types of land loans don’t. Let’s take a look at the process for buying land with a personal loan. Then, we’ll carefully weigh the pros and cons of this option.

You can use a personal loan to pay for just about anything, and that can include a land purchase. Once you’re approved for a personal loan, the lender or credit union you’re borrowing from pays you a lump sum that you can then pay back over the length of the loan term.

How you plan to use your loan won’t affect your approval. Factoring into your financing, however, is your credit score and your debt-to-income ratio (DTI). Banks and credit unions may also offer more favorable terms to longtime customers and members.

Keep in mind, though, that if you’re planning to also build a home on the land you buy, you’ll be paying back your personal loan while trying to budget for the construction of your house. If you take out another loan to finance building the home, you’ll be paying back multiple loans at once. If that sounds less than ideal, this approach to financing land might not be right for you.

Can You Use Personal Loans For Property?

A major difference between personal loans and mortgages is that you can borrow much more money with a mortgage loan. With a personal loan, you can typically borrow from $1,000 to $50,000, with a maximum loan of $100,000 under special circumstances. If you’re eyeing a smaller home, like a manufactured home, you might consider paying for it with a personal loan. For more traditional homes and property, we recommend going with a mortgage.

Getting a personal loan is a relatively straightforward process.

You should always compare rates and terms between lenders before taking on a loan, so you’ll want to first get prequalified with a soft credit check. Once you’ve found an offer that works for you, submit an application and wait to see if you’re approved. If your application is approved, you should receive your funds within a week, but it could happen within a day or two. Rocket Loans℠ offers same-day funding, meaning you could potentially get your money on the day you apply.*

Getting approved depends largely on your credit score. For a personal loan with a good rate and terms, you’ll likely need a score of 650 or higher. A DTI under 36% will also boost your chances of approval.

Once you have your funds, all that’s left is to make your offer to the landowner. According to a 2022 summary by the USDA National Agricultural Statistics Service, the average cost of land per acre is $3,800. Depending on how much land you plan to buy and how much you can borrow, you might be able to use your loan to pay for all or much of your purchase.

Using a personal loan to buy land has some benefits over other means of land purchase, but the process comes with drawbacks as well. Next up, we’ll carefully consider the advantages and disadvantages of using a personal loan for land.

Pros

• A strong likelihood of being unsecured: Personal loans are typically unsecured loans, meaning you won’t have to put up any collateral to secure the loan. Otherwise, you could stand to lose the asset you use for collateral if you default on the loan.
• Fewer fees: While more traditional loans tend to come with multiple costs – including charges for an appraisal, processing and underwriting – personal loans often require only an origination fee. You could be saving money by using a personal loan for land, especially if you can qualify for a lower annual percentage rate (APR).
• Shorter terms: The term for a personal loan is typically 12 – 60 months, shorter than the term for some other types of loans. If you don’t want to be paying off a loan for years on end, a personal loan might be the right choice for you.
• Fast funding: As mentioned above, personal loans have a faster turnaround time than many other loans, and this can be beneficial if you need your money fast.

Cons

• Lower loan amounts: As discussed above, personal loans can only be so big, and they’re generally no more than $50,000. If you divide that by the average price of land – $3,800 per acre – that could buy you over 13 If you’re looking to purchase a bigger plot of land, a personal loan may not be your best option.
• Higher credit score required: To get a decent rate and decent terms, a borrower will need a credit score of 650 or higher. For most people with a lower credit score, a personal loan won’t be very accessible, and it could come with unfavorable terms even if approved. Improving your credit can open up more loan options for buying
• Higher interest rates: Because a personal loan is usually unsecured, the interest rate may be a little higher than with another type of loan. You can qualify for a good interest rate and APR with a higher credit score, since your creditworthiness will help assure a lender that you’re good to repay the loan.

If a personal loan doesn’t sound like your best option for buying land, there are a few other means through which you can finance your land purchase. Let’s take a look at some.

Land Loans

A land loan can be acquired through a bank or credit union. To qualify for a loan to buy a plot of land, the borrower must have an excellent credit score and explain to their potential lender how they intend to use the land. Factors like zoning, property lines and access to utilities can inform a lender how risky a loan might be for them to approve, and these same factors may influence the loan’s rate and terms. A land loan will also require a down payment, the amount of which may depend on the type of land you intend to buy.

Here are three main types of land loans:

• Raw land loans: “Raw land” is defined as completely undeveloped land, with no utilities or even roads. Having a detailed plan of how you’ll use the land can help convince a lender to finance this type of land purchase. A raw land loan will usually require a large down payment because of the risk it poses to the lender.
• Unimproved land loans: “Unimproved land” is a little more developed than raw land since it usually includes some utilities and amenities, but you would still need to give your potential lender a detailed plan of your intentions. The required down payment is lower for an unimproved land loan than a raw land loan, but it’s still higher than the down payment that many types of financing require.
• Improved land loans: “Improved land” has access to utilities, roads and water, so it may be more expensive to buy than raw or unimproved land. Because improved land has some known value attached to it, the interest rate and down payment tend to be lower when getting a loan.

Construction Loans

A construction loan, as its name implies, can cover the construction of a house on a plot of land, after which the borrower applies for a mortgage on that house. Because the buyer’s primary intention with a construction loan is to build a house on top of the land, the loan may feel like less of a risk for a lender. This could also lead to a lower down payment and interest rate.

USDA Loans

The U.S. Department of Agriculture (USDA) offers two short-term loans for buying land: Section 523 loans and Section 524 loans. Both loans offer a low interest rate, but the 523 loan stipulates that the borrower is responsible for providing the labor for their construction project. Meanwhile, the 524 loan doesn’t impose any limits on methods of construction.

Home Equity Loans

Similar to a personal loan, a home equity loan can provide you with a lump sum that you can spend as you wish. The caveat is that your loan is secured by the equity in your home. So if you default on the loan, your lender could take possession of your home through the foreclosure process.

HELOCs

HELOC stands for home equity line of credit. Like home equity loans, HELOCs are secured by your home’s equity – a fancy way of describing the difference between a home’s value and the total principal balance you still owe in house payments. A HELOC provides a borrower with a revolving line of credit that they can borrow from and pay back. As with a home equity loan, your home is at risk of foreclosure if you fail to repay the amount you borrow.

Seller Financing

The owner of the land being sold will sometimes be willing to lend directly to the buyer. A common repayment term for a seller-financing loan is 5 – 10 years, and you won’t have to pay the closing costs you would pay with a traditional lender.

Seller financing typically requires a large down payment, but nearly every other aspect of the loan and transaction is negotiable. One drawback to this method is that you only have the word of the seller with regard to the value and condition of the land. It could be beneficial to pay for research on the land’s title and boundaries, just to be on the safe side.

Buying land can offer a lot of opportunities, and securing a good loan is a way to begin the process. If you want to qualify for the best land loan, your most important assets will be an excellent credit score and a plan for what you want to do with the land you’re buying.

Interested in buying land with a personal loan? Get an application started today with Rocket Loans.

*Same Day Funding available for clients completing the loan process and signing the Promissory Note by 1:00PM ET on a business day. Also note, the ACH credit will be submitted to your bank the same business day. This may result in same day funding, but results may vary and your bank may have rules that limit our ability to credit your account. We are not responsible for delays which may occur due to incorrect routing numbers, incorrect account numbers, or errors of your financial institution.