Land Loan

A land loan is financing used to buy a vacant lot — a parcel of property with no dwelling on it — rather than a home that already exists. Because raw land is harder for a lender to appraise and to resell if the borrower defaults, land loans typically come with a higher interest rate and a lower loan-to-value ratio than a comparable mortgage on an improved residential property.

Why vacant land is treated differently

A house gives a lender two things: a marketable asset and, in most cases, a place someone can live. Bare land offers neither in the same way. It generates no rental income, it may be unserviced, and resale can take months depending on the local market. Land deals therefore sit outside the mainstream channel: federal mortgage default insurance is generally not available for vacant land without a dwelling, so most land purchases are arranged as conventional mortgages — uninsured loans — through banks, credit unions, and alternative or private lenders.

How land loans are structured

Underwriting still follows the spirit of OSFI Guideline B-20: lenders look at credit score, verified income, net worth, and the property itself. Expect questions about:

• whether the lot is serviced — water, sewer or septic, hydro, and road access;
• zoning and permitted use, including whether a building permit is achievable;
• the lender's own appraisal of the land, which often differs from the asking price;
• a loan-to-value ratio set well below what an occupied home would support.

Because that ratio is lower, the borrower brings a larger share of the purchase price in cash, plus funds for site work, servicing, property tax and legal costs. Terms are often shorter than on a residential mortgage, and lenders may require the loan to be repaid or rolled into a construction mortgage once building begins.

Why it matters to a borrower

Cash requirements are the main practical difference. A buyer who can qualify for a home mortgage may still need considerably more equity to buy the same value in land, and the higher rate raises the carrying cost during the holding period. It is also worth confirming how the loan is secured — a first charge on the lot versus a collateral charge — and what prepayment penalties apply if the borrower sells or refinances early. Requirements vary by institution and change over time, so confirm current policy with the lender before making an offer.