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 may be an option worth exploring when you’re buying land. 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 the loan, the lender or credit union you’re borrowing from pays you a lump sum. You can then pay this sum back over the length of the loan term.

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

Keep this in mind, though: If you plan to build a home on the land you buy, you’ll have to pay back your personal loan while you 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 A Personal Loan To Buy Property?

A major difference between a personal loan and a mortgage is that you can usually borrow more money with a mortgage loan. With a personal loan, you can typically borrow from $1,000 – $50,000. Under special circumstances, personal loan amounts may even reach up to $100,000.

If you’re eyeing a smaller home, such as a manufactured home, you might consider paying for it with a personal loan. For more traditional homes and property, we recommend going with a traditional mortgage.

Getting a personal loan is a relatively straightforward process.

You should compare rates and terms between lenders before you take on a loan. Getting prequalified with a soft credit check allows you to compare your loan offers. Once you find an offer that works for you, submit an application and wait to see if you’re approved.

If your application is approved, you should get your funds within a week, but it could happen within a day or two. Rocket Loans℠ even offers same-day funding, meaning you could get your money on the day you apply.¹

Getting approved depends largely on your credit score. For a personal loan with a good interest rate and term, you’ll likely need a score of 650 or higher. A DTI under 36% can 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 2023 report by the U.S. Department of Agriculture (USDA) National Agricultural Statistics Service, the average cost of land per acre on a farm is $4,080. Depending on how much land you plan to buy and how much you can borrow, your loan may cover all or most of your purchase.

Using a personal loan to buy land has some benefits over other ways to make a land purchase. But the process comes with drawbacks as well. Let’s consider some advantages and disadvantages of using a personal loan for land.

Pros

• A strong likelihood of the loan being unsecured: Many personal loans are unsecured loans, meaning you won’t have to secure the loan with collateral. Otherwise, you could lose the asset you use for collateral if you default on the loan.
• Fewer fees: More traditional loans tend to come with multiple costs, such as appraisal, processing and underwriting Personal loans, however, often require only an origination fee. You could save money by using a personal loan for land, especially if you qualify for a lower annual percentage rate (APR).
• A shorter repayment period: A typical personal loan term is 12 – 60 months, shorter than the standard term for some other loan types. If you don’t want to pay off a loan for years on end, a personal loan might be the right choice for you.
• Fast funding: As mentioned above, some personal loans have a faster turnaround time than many other loans. This can be beneficial if you need your money in a hurry.

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 amount by the average price of farmland – $4,080 per acre – that could buy you around 12 acres. If you’re looking to purchase a bigger plot of land, a personal loan may not be your best option.
• A higher credit score being required: To get a decent rate and decent term, you typically need a credit score of 650 or higher. For many people with a lower credit score, a personal loan won’t be very accessible. It could come with unfavorable terms even if you’re Improving your credit can open up more loan options for buying.
• Higher interest rates: A personal loan is usually unsecured, so the interest rate may be a little higher than with another type of loan. You can often qualify for a good interest rate and APR with a higher credit score, though. Your creditworthiness can 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, you can finance this purchase a few other ways. Let’s take a look at some of them.

Land Loans

Most banks and credit unions offer land loans. To qualify for a loan to buy land, you usually must have an excellent credit score. You may also need to let your potential lender know how you intend to use the land.

Factors such as zoning, property lines and access to utilities can tell a lender how risky a loan may be for them to approve. These same factors may influence the loan’s rate and term as well.

A land loan also generally requires 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 usually requires 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. It usually has some utilities and amenities, but you’d still need to give your potential lender a detailed plan of your intentions. The required down payment for an unimproved land loan is lower than the down payment for a raw land loan. However, it’s still higher than the down payment required for many types of
• Improved land loans: “Improved land” has access to utilities, roads and water, so it may be more expensive than raw or unimproved land. Since improved land has known value attached to it, the interest rate and down payment tend to be lower on a

Construction Loans

A construction loan, as its name implies, can cover the construction of a house on a plot of land. After construction, the borrower applies for a mortgage on that house. Since the primary intention of a construction loan is often to build a house on the land, the loan may feel like less of a risk for a lender. This could lead to a lower interest rate and down payment.

USDA Loans

The USDA offers two short-term loans for buying land: Section 523 loans and Section 524 loans. Both loans offer a low interest rate, but with a 523 loan, the borrower is responsible for providing 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 your home equity – the difference between your home’s value and the total principal balance you still owe in house payments. So, if you default on the loan, your lender could take possession of your home through foreclosure.

HELOCs

HELOC stands for home equity line of credit. Like home equity loans, HELOCs are secured by your home’s equity. A HELOC provides a borrower with a revolving line of credit 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 is sometimes willing to lend directly to the buyer. A common repayment term for a seller-financing loan is 5 – 10 years. You also won’t have to pay the closing costs you’d pay with a traditional lender.

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

Let’s explore some frequently asked questions people ask about buying land with a personal loan.

What is the average interest rate on a personal loan to buy land?

Personal loan interest rates fluctuate over time. According to the Federal Reserve, the average interest rate for a personal loan with a 24-month term was just over 12% for Q3 2023.

Can I use a personal loan to buy land if I have bad credit?

Getting approved for a personal loan to buy land can be harder if you have a lower credit score. It’s not impossible, however. Some lenders offer loans specifically for borrowers with a low score or negative marks on their credit history.

Be aware, though, that these loans may come with limitations, such as lower loan amounts. This can ultimately cap the amount of land you’re able to buy with the loan. If possible, you may want to focus on improving your credit score before applying for a personal loan to buy land.

What is the best way to buy land?

The best way to purchase land depends on your situation. If you have the cash on hand, you could buy land outright to avoid interest fees.

If financing makes more sense for you, the right financing option depends on several factors. Your financial situation, as well as the land’s size and location, will likely influence how you fund your land purchase. If your credit score and DTI help you qualify for ideal personal loan terms, financing may be worth considering.

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 are an excellent credit score and a plan for what you’ll do with the land you buy.

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

¹Same 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.