Why are land loan rates higher than home mortgage rates?

Question

Turnrow Capital · Accepted Answer

Land loans price higher because the collateral is harder to sell, there is no government-backed secondary market buying them, and default risk runs higher without a home the borrower lives in. Lenders carry these loans on their own books, so they price for illiquidity — typically 1–4 points over residential mortgages.

Home mortgages are cheap because Fannie Mae and Freddie Mac buy them by the trillion, standardizing risk and recycling capital. No equivalent machine exists for bare land or ag ground. A lender making a land loan usually holds it to maturity, tying up capital, and prices for that.

Collateral liquidity is the second driver. A foreclosed house in a subdivision sells in 60–90 days. A 300-acre parcel might take a year to find its buyer, and the pool of buyers is thin. Lenders discount for the time and cost of a longer disposition, and that discount shows up in your rate.

Finally, borrowers historically default on land before they default on the roof over their heads. Non-owner-occupied, business-purpose land carries no owner-occupancy anchor, so lenders underwrite it as an investment asset — with investment-asset pricing.