Lot loan basics: how to finance land in Illinois and Wisconsin before you build

Why land is harder to finance than a house

Most home mortgages are sold to Fannie Mae or Freddie Mac or insured by FHA, VA, or USDA. Those programs are built around a home someone will live in. There is no equivalent national market for a loan secured only by vacant land, so a land loan is almost always a bank product: the bank lends its own money and keeps the loan on its own books.

Land is also riskier collateral. It produces no shelter and no income, it takes longer to sell than a house, and its value depends on whether it can be built on. Federal banking guidelines reflect that. The supervisory loan-to-value limits that apply to banks are lower for land than for any other kind of real estate loan.

Raw land vs an improved lot

Lenders sort land into two broad groups. Raw land has no improvements: no road frontage or only an easement, no utilities, maybe no survey. An improved lot is ready to build on, typically in a platted subdivision, with a public road, utilities at the lot line, and zoning already in place.

The closer the land is to a building permit, the easier the vacant land loan. A subdivision lot in Huntley or Little Chute that a builder could start on next month is a very different request from 40 wooded acres with a logging road. Both can sometimes be financed, but expect the raw parcel to take more money down and more homework.

How lot loan down payments and terms usually work

Across the market, land loans tend to share a few features. Down payments are larger than on a home mortgage, commonly somewhere from 20% to 50% depending on the type of land. Terms are shorter, often with a balloon or an adjustable rate instead of a 30-year fixed. Rates generally run higher than home mortgage rates, because the collateral is riskier and the loan cannot be sold.

Those are general market patterns, not our terms. Home State Bank makes lot loans as part of its portfolio and construction lending, and the terms depend on the parcel, your plans, and your finances. Ask a loan officer about current lot loan terms, and bring your building timeline to that conversation, because when you plan to build shapes the loan.

What the bank looks at before it finances land

With a house, the appraisal and inspection answer most property questions. With land, the question is simpler and harder: can you build what you plan to build here, at a cost that makes sense? These are the items we ask about, and they are worth checking before you sign an offer, or worth writing into it as contingencies.

• Legal access: frontage on a public road, or a recorded easement. A parcel with no legal access is very difficult to finance.
• Zoning and buildability: confirm with the county or municipality that a home is a permitted use and that the lot meets minimum size, width, and setback rules.
• Septic: outside sewer service areas you need soil that supports a system. In Wisconsin a certified soil tester evaluates the site for a private onsite wastewater treatment system, and the county issues the sanitary permit. In McHenry County the Department of Health permits septic systems and wells, based on a soil evaluation.
• Water: a municipal connection, or a well. Ask what nearby wells produce and how deep they are.
• Utilities: the distance to electric, gas, and internet, and who pays to extend them. A long driveway and a long power run can change the budget.
• Survey: a current boundary survey showing easements and encroachments.
• Flood zone and wetlands: check the FEMA flood map, and ask about mapped wetlands, which can shrink the buildable area.
• Title: covenants, deed restrictions, and any association rules on home size or style.

Rolling a lot loan into a construction-to-permanent loan

A lot loan is usually a first step. When your plans, builder, and budget are ready, the lot loan is typically paid off by a construction loan, and the equity you hold in the land counts toward your down payment on the whole project. If you bought a lot for $80,000 with $24,000 down and have paid the balance down since, that equity goes to work when you build. The numbers here are only an example.

Our construction-to-permanent loan is designed as one loan that covers the build and then converts to a regular mortgage when the home is finished, which avoids a second closing. If you already know your builder and expect to start within months, it can make sense to skip the separate lot loan and buy the land inside the construction loan. If the build is a year or more away, a lot loan holds the land while you plan. Our guide to construction-to-permanent loans covers draws, inspections, and what we need from your builder.

Land loan in Wisconsin vs land loan in Illinois

The most common land loan Illinois buyers ask us about is a buildable lot in McHenry County: a subdivision lot in Huntley, Woodstock, or Marengo, or a few acres in an unincorporated area. Subdivision lots are usually the simplest. For rural acreage, the questions are county zoning, septic and well, and sometimes whether farmland can be split into a legal building site. Talk to McHenry County Planning and Development early.

In Wisconsin, buildable lots around Appleton, Neenah, and Kaukauna look much the same. Recreational land farther north is a different request. Hunting land and lake lots often come with easement access, wetlands, and shoreland zoning, which in Wisconsin applies within 1,000 feet of a lake and 300 feet of a river or stream and generally sets a 75-foot building setback from the water. A parcel bought purely for recreation, with no plan to build, is underwritten as raw land. If you plan a cabin or a lake home later, say so, and see our guide to financing a Wisconsin lake house.