How Hard Is It to Finance Raw Land?

Raw land sits at the top of the commercial lending risk pyramid. Unlike improved property with existing structures, utilities, and income streams, unimproved acreage offers lenders nothing but dirt and potential. That reality makes financing raw land one of the most challenging tasks in commercial real estate, but far from impossible if you understand what lenders want and how to position your deal.

Whether you are assembling parcels for a subdivision, acquiring acreage for a future commercial project, or purchasing land as a long-term hold, you need a clear picture of the financing landscape. This guide breaks down the actual numbers, the lender mindset, and practical steps to improve your approval odds.

If you are looking at land for a development project and want expert guidance on structuring the right loan, contact Clearhouse Lending for a free consultation. Our team specializes in horizontal construction loans and land-to-vertical financing strategies.

Why Is Raw Land Harder to Finance Than Improved Property?

Raw land is harder to finance because it lacks the two things lenders value most: income-producing capability and a completed structure that serves as reliable collateral. When a borrower defaults on a commercial mortgage for an office building or apartment complex, the lender can foreclose on a functioning asset that generates revenue. With raw land, the lender inherits an empty parcel that may be difficult to resell.

Federal regulators reinforce this reality. The FDIC's interagency guidelines cap supervisory loan-to-value ratios for raw land at 65%, compared to 75% for land development, 80% for multifamily construction, and 85% for one-to-four family residential construction. Those caps signal to banks exactly how regulators view the risk hierarchy.

Beyond the regulatory framework, several practical factors make raw land riskier for lenders:

• No cash flow. Raw land produces zero income, so the borrower must service debt entirely from outside sources.
• Illiquidity. Vacant land can sit on the market for months or years, making it harder for lenders to recover funds after default.
• Uncertain value. Appraising raw land involves more assumptions than valuing improved property, especially around highest-and-best-use analysis.
• Entitlement risk. Zoning changes, permitting delays, and environmental issues can erode land value before a shovel ever hits the ground.
• Development timeline. The longer the gap between purchase and income generation, the greater the risk of market shifts or borrower financial deterioration.

These factors combine to create a financing environment where lenders demand more equity, charge higher rates, and impose shorter repayment terms. According to Bankrate, land loan interest rates run 1-3 percentage points above conventional mortgage rates, and terms are typically limited to 10-15 years rather than the standard 30-year amortization.

What Are the Loan Options for Raw Land Purchases?

Several distinct loan products exist for raw land purchases, each suited to different borrower profiles and land-use intentions. The right option depends on the size of the parcel, the intended use, the development timeline, and whether the borrower is an individual or a commercial entity.

Bank and credit union land loans remain the most common option for smaller parcels. Community banks and credit unions that focus on local markets often have land lending programs with rates from 6.5% to 10% and terms of 5-15 years. These lenders prefer borrowers with existing banking relationships and familiarity with the local market.

SBA 504 loans can finance land acquisition for owner-occupied commercial development. The structure typically involves 50% from a bank, 40% from a Certified Development Company (CDC), and 10% from the borrower, according to the U.S. Small Business Administration. However, the property must ultimately be occupied by the business, ruling out speculative land purchases.

Private money and hard money lenders fill the gap for borrowers who cannot qualify through traditional channels. These lenders focus more on the property's potential value and the borrower's exit strategy than on credit scores or income verification. Rates are higher (typically 10-14%), but approval timelines are measured in days rather than weeks.

Seller financing is surprisingly common in raw land transactions. Many land sellers are willing to carry a note because they understand the difficulty buyers face in obtaining conventional financing. Terms are negotiable, and down payment requirements may be lower than bank standards.

USDA loans serve buyers in eligible rural areas who plan to build a primary residence. These programs can finance both the land purchase and construction with as little as zero down payment for qualified borrowers, according to The Mortgage Reports.

For commercial development projects, bridge loans can serve as interim financing for land acquisition when the borrower plans to transition into a construction loan. This approach works well when the land has development potential but needs entitlements or site work before a construction lender will commit.

What Down Payment Do You Need for Raw Land Financing?

The standard down payment range for raw land financing is 30% to 50% of the purchase price, making it one of the most equity-intensive loan types in commercial real estate. This stands in stark contrast to improved property loans, where 20-25% down is more typical, or government-backed residential programs that accept as little as 3.5%.

The exact down payment depends on several variables that lenders weigh during underwriting:

According to LendingTree, the breakdown generally falls along these lines based on property condition:

• Raw land with no utilities or road access: 35-50% down
• Unimproved land with some infrastructure nearby: 25-40% down
• Improved lots with utilities and road access: 20-30% down
• Fully developed lots ready for construction: 10-25% down

For a $500,000 raw land purchase at 40% down, you would need $200,000 in equity. That is a significant capital commitment, but it reflects the risk premium lenders place on unimproved property.

Several strategies can reduce the effective down payment:

1. Cross-collateralization. Pledging other real estate you own as additional collateral can reduce the required cash down payment on the land.
2. Seller financing for a portion. Negotiating a seller second position behind the bank can bridge part of the equity gap.
3. Land contract or installment sale. Buying directly from the seller on contract avoids the bank entirely, often with 10-20% down.
4. Joint venture equity. Partnering with an investor who contributes equity in exchange for a share of the eventual development profits.

Ready to discuss your raw land acquisition strategy? Reach out to our lending advisors to explore creative financing structures tailored to your project.

What Interest Rates Should You Expect for Raw Land Loans?

Raw land loan interest rates typically range from 7% to 12%, depending on the lender type, loan term, borrower creditworthiness, and property characteristics. This premium reflects the elevated risk profile that lenders assign to unimproved property and the regulatory capital requirements associated with land lending.

Here is how rates generally break down by lender category as of 2026:

• Community banks and credit unions: 6.5-9.5% for well-qualified borrowers with strong banking relationships
• Regional and national banks: 7.5-10% for raw land, often with additional fees
• Private and hard money lenders: 10-14% with origination fees of 2-4 points
• Seller financing: 5-9%, highly negotiable depending on the seller's motivation
• SBA 504 (for eligible projects): 6-8% for the bank portion, with the CDC portion typically at below-market rates

The rate you receive depends heavily on your overall financial picture. Borrowers with credit scores above 720, substantial liquid reserves, and a clear development plan will qualify for the lower end of these ranges. Borrowers with limited experience, lower credit scores, or speculative land purchases will face rates at the higher end.

Loan terms also affect the rate. Shorter terms of 3-5 years typically carry lower rates than 10-15 year terms because the lender's risk window is compressed. Many raw land lenders offer variable rates tied to the prime rate or SOFR, which means your payment could increase if benchmark rates rise.

Use our commercial mortgage calculator to estimate your monthly payments at different rate and term combinations.

How Do Lenders Evaluate Raw Land Loan Applications?

Lenders evaluate raw land loans through a more rigorous underwriting process than standard commercial mortgages because the risk factors are less predictable. Understanding the evaluation criteria gives you a significant advantage in preparing a strong application.

The primary areas lenders scrutinize include:

Borrower financial strength. Expect lenders to require a minimum credit score of 680-720, a debt-to-income ratio below 40%, and liquid reserves sufficient to cover 6-12 months of debt service. According to ValuePenguin, most lenders want to see that land loan payments will not exceed a manageable percentage of your total income.

Development plan and timeline. A detailed plan showing what you intend to build, the expected timeline, and projected returns significantly strengthens your application. Lenders view a borrower with a clear development strategy as far less risky than one purchasing land speculatively.

Property characteristics. The location, topography, environmental condition, access to utilities, road frontage, zoning designation, and surrounding land uses all factor into the lender's risk assessment. Land near existing development with favorable zoning commands better terms than remote parcels in agricultural zones.

Exit strategy. Every land lender wants to know how you plan to repay the loan. Whether through development and sale, refinancing into a construction loan, or resale of the entitled land, a well-articulated exit strategy is essential.

Appraisal and survey. Most lenders require a full ALTA boundary survey and a professional appraisal that includes a highest-and-best-use analysis. The appraisal must support the purchase price or the lender will reduce the loan amount accordingly.

What Can You Do to Improve Your Chances of Getting a Raw Land Loan?

You can significantly improve your approval odds by addressing the specific concerns that make lenders hesitant about raw land. The borrowers who succeed in this space treat the loan application like a business pitch, not just a financial request.

Start with these high-impact strategies:

Develop a comprehensive site plan. Commission preliminary engineering, survey work, and a conceptual development plan before approaching lenders. Even basic documents showing proposed lot layouts, infrastructure routing, and phasing can transform how a lender views your request.

Build a relationship before you need the loan. Community banks and credit unions lend to people they know. Opening deposit accounts, establishing a line of credit, and meeting with commercial loan officers months before you need land financing puts you in a much stronger position.

Bring more equity than required. If the lender asks for 35% down, offering 40-45% demonstrates confidence in the project and reduces the lender's exposure. This approach often results in better rates and more flexible terms.

Show liquid reserves. Maintain cash reserves well above the minimum requirement. Land development involves unexpected costs for environmental remediation, utility extensions, and permitting delays. Lenders want assurance you can weather surprises.

Secure preliminary entitlements. If you can obtain preliminary zoning approval, environmental clearance, or letters of intent from utility providers before closing on the land, the deal becomes dramatically more attractive to lenders.

Present comparable transactions. Show the lender examples of similar land parcels that sold for higher prices after development, or similar projects you have completed successfully. Track record matters enormously in land lending.

For help structuring a land acquisition that positions you well for construction financing, reach out to Clearhouse Lending. We work with borrowers at every stage of the development cycle.

How Does Raw Land Financing Change Once Entitlements Are Secured?

Securing entitlements transforms raw land from a speculative asset into a development-ready property, and lenders respond accordingly. The shift in financing terms can be dramatic, with improved LTV ratios, lower interest rates, and access to a broader range of lending products.

Entitlements include zoning approvals, site plan approvals, grading permits, utility commitments, and environmental clearances. Each entitlement you secure reduces a layer of development risk and increases the land's appraised value. In many markets, entitled land can be worth two to five times the value of the same parcel without entitlements.

Once entitlements are in place, your financing options expand significantly:

• Construction loans become available for the actual development phase. These loans cover horizontal improvements like grading, roads, and utilities, or vertical construction of buildings. See our guide to land acquisition financing for more on transitioning from land loans to construction loans.
• Higher LTV ratios apply. The FDIC guidelines allow 75% LTV for land development (up from 65% for raw land) and 80-85% for construction, meaning you need less equity as a percentage of the project.
• Lower interest rates reflect the reduced risk profile. Entitled land with approved plans might command rates 1-3 percentage points below raw land rates.
• Longer loan terms become available as lenders gain confidence in the development timeline and projected returns.

The key insight for borrowers is that the raw land financing phase should be viewed as a short-term bridge to better terms. The faster you can move from raw land to entitled, development-ready property, the sooner you access more favorable financing. This is where horizontal construction loans come into play, funding the site development that turns raw acreage into buildable lots.

What Are the Alternatives to Traditional Raw Land Loans?

If traditional bank financing for raw land proves too difficult or too expensive, several alternative approaches can get you to the same end result. Experienced developers often combine multiple strategies to minimize cost and maximize flexibility.

Seller financing remains one of the most underutilized tools in land acquisition. According to Rocket Mortgage, many land sellers are motivated to offer financing because it generates passive income and expands their buyer pool. Typical seller-financed terms include 10-30% down, 5-8% interest, and 5-15 year amortization with a balloon payment.

Land contracts (contract for deed) allow you to make payments directly to the seller while they retain legal title until the contract is satisfied. This arrangement avoids bank underwriting entirely and can work well for smaller parcels where the seller is flexible.

Joint venture partnerships bring together a land buyer (who may lack capital) and an equity partner (who lacks the development expertise or deal access). The equity partner funds the acquisition in exchange for a predetermined share of future development profits.

Option agreements let you control land without purchasing it outright. By paying a relatively small option fee (typically 1-5% of the purchase price), you gain the exclusive right to buy the parcel within a specified timeframe. This approach lets you pursue entitlements and line up construction financing before committing to the full purchase.

Crowdfunding and syndication platforms have emerged as viable alternatives for larger land acquisitions. These structures pool capital from multiple investors, reducing the burden on any single borrower.

Self-directed IRA or 401(k) funds can be used to purchase raw land in certain circumstances, though there are strict rules about personal use and self-dealing that require guidance from a qualified tax advisor.

Each alternative comes with its own set of trade-offs between cost, complexity, speed, and control. The right approach depends on your specific situation, timeline, and development goals. For a deeper look at creative financing strategies, read our land acquisition financing guide.

Frequently Asked Questions

Can you get a 30-year mortgage on raw land?

No, 30-year mortgages are not available for raw land purchases through conventional lenders. Most raw land loans carry terms of 5-15 years. Some seller-financed arrangements may offer longer amortization schedules, but they typically include balloon payments that shorten the effective term. Once you build on the land and it becomes improved property, refinancing into a longer-term mortgage becomes possible.

What credit score do you need for a raw land loan?

Most lenders require a minimum credit score of 680-720 for raw land loans, with the best rates reserved for borrowers scoring 740 and above. Some private lenders and seller financing arrangements may accept lower scores, but expect to pay higher rates and provide larger down payments in exchange.

Do banks finance raw land?

Yes, but not all banks offer raw land loans. Community banks and credit unions with local market knowledge are the most likely traditional lenders to finance raw land. National banks tend to avoid raw land loans due to the higher capital requirements imposed by federal regulators. Your best approach is to start with local lenders who understand the market where the land is located.

How long does it take to get approved for a raw land loan?

Bank approval for a raw land loan typically takes 30-60 days, depending on the complexity of the appraisal and environmental review. Private and hard money lenders can close in 7-14 days but charge higher rates. SBA loans may take 60-90 days due to the additional government approval process.

Is it better to buy raw land with cash or financing?

Paying cash eliminates interest costs and gives you maximum negotiating leverage with the seller. However, using financing preserves your cash for development costs and allows you to control more land with less capital. Many experienced developers use short-term land financing and then roll the balance into a construction loan when they are ready to build. Use our bridge loan calculator to compare the cost of different financing scenarios.

Can you use raw land as collateral for a business loan?

Raw land can serve as collateral for a business loan, but lenders will typically discount its value significantly. Expect lenders to apply a 40-60% haircut to the appraised value when accepting raw land as collateral, reflecting the difficulty of liquidating the asset quickly if needed.