What Is a Lot Loan and When Do I Need One?

A lot loan finances the purchase of land before construction begins. You need one when you've found the right parcel but aren't ready to start building, and you don't want to buy it with cash.

When a lot loan makes sense

• You found land you want and don't want to lose it while you design
• You're planning to build in a year or two rather than immediately
• You want to secure a lot in a development before the good ones go
• You're not ready to commit to a construction loan yet

When you probably don't need one

If you're ready to build now, many construction loans can include the land purchase in the same transaction. That's simpler and usually cheaper than financing the land separately and then refinancing it. Ask your lender before assuming you need two loans. See construction-to-permanent loans.

How lot loans differ from mortgages

Raw land is harder collateral for a lender than a house. Expect terms to be less generous than a mortgage: typically a larger down payment, a shorter term, and a higher rate. Terms also vary based on whether the parcel is improved (utilities at the road, in a platted development) or raw and unimproved. Lenders view those very differently.

What lenders look at

• Whether the lot is buildable, with legal access and available or achievable utilities
• Zoning and any restrictions on the parcel
• Whether public sewer and water are available or a septic system will be needed. See well and septic
• Your credit, income and reserves
• Your timeline to build

How it converts

When you're ready to build, the lot loan is typically paid off by the construction loan, and your equity in the land often counts toward your down payment. That's one of the real advantages of owning the lot outright before you start. See down payment.

Before you buy any parcel

Get it evaluated. A lot you can't build the house you want on is a costly thing to own. See what to look for when buying a lot and how to buy land to build on.