A raw land loan is a loan that is used to help finance the purchase of undeveloped, or raw, land. Such land has no form of infrastructure on it that can be used as collateral.
Land loans in general are riskier for lenders because the owner of the land can decide to leave the lender with the property without making the payments for the loan. For undeveloped property it’s even higher risk. As a result, a raw land loan will require a higher down payment a higher interest rate than most other kinds of loans. The down payment could range from 20% to 50%, depending on the lender, which will assure them some degree of security. The interest rates depend on a great number of factors, but are high. Because of the risk factors, a lender usually will have to know a fair deal about the property being purchased and what your plans are for the property before agreeing to extend a loan for it. Such loans usually have maturity terms of about 10-15 years, like a home equity loan. Additionally, the interest payments are sometimes tax deductible, making a raw land loan a little more bearable for real estate investors.
One of the most vital concerns for a business to address before seeking a raw land loan is a solid business plan. If you can show the bank or financial institution you apply at the way in which you are going to invest the money to develop the land and thus turn a profit, and the process that it will take to reach that point, you are much more likely to get the loan.
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