Similar to home equity, land equity is the value of your land minus any money you owe on the loan used to purchase it. With a land equity loan, you can turn that equity into cash without having to sell the land itself. You can use it to build a home on the property, pay down high-interest debt or cover unexpected medical bills.
Using land as collateral for a loan can be an attractive option for landowners looking to access funds. Whether you want to tap into your land’s equity to pay off debt, finance a new project, or have extra cash on hand, pledging land as collateral provides an alternative source of financing.
However, land collateral loans come with unique requirements, risks, and considerations In this comprehensive guide, we’ll explore everything you need to know about using land as loan collateral, including
- What is land as collateral?
- How does it work?
- What are the loan options?
- What are the pros and cons?
- What are the requirements and eligibility?
- Is it a good idea for you?
- Frequently asked questions
Let’s dive in!
What Is Land as Collateral?
Using land as collateral means pledging your land as security for a loan. If you default on the loan, the lender can seize and sell your land to recover their money.
It works similarly to a home equity loan where your home acts as the collateral. But with a land collateral loan undeveloped land or vacant lots serve as the asset backing the loan rather than a residential property.
You can use both vacant land and land with structures as collateral However, lenders consider vacant land riskier and will likely lend less compared to improved land
How Does Using Land as Collateral Work?
Here are the basic steps to get a loan with land as collateral:
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You own the land outright or have equity. You’ll need clear title to the land or substantial equity if you still have a mortgage.
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The lender appraises the land. This establishes the property’s fair market value. Higher appraisals allow you to borrow more.
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The lender places a lien on the land. The lien gives the lender the legal right to take possession and sell the land if you default.
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You receive the loan amount. The loan proceeds get disbursed to you at closing.
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You repay the loan as agreed. This keeps your land safe. Defaulting risks the lender seizing and selling your land.
It’s a simple concept secured by real estate. But know that qualifying and finding a willing lender can be challenging compared to other loan types.
Loan Options When Using Land as Collateral
If you decide to use land as collateral, you have several loan options to consider:
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Land equity loan – This loan taps your land’s equity value similar to a home equity loan. You can access a lump sum at a fixed or adjustable rate.
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Land equity line of credit (LOC) – A revolving credit line functions like a HELOC. You can draw as needed up to your approved limit.
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Land equity refinance – You take out a new, larger land loan and pocket the difference, allowing you to cash out equity.
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Land purchase loan – Banks offer land loans to buy and finance vacant land with the land itself as collateral.
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Construction loans – Builders secure construction financing using empty land they already own as collateral.
Compare all options to find the best loan type, rates, and terms for your situation. Know that land collateral limits your borrowing power compared to using an existing home.
Pros and Cons of Using Land as Collateral
Land collateral loans provide unique benefits but also pose considerable risks you must consider:
Pros
- Access your land’s equity without selling
- Potentially lower rates than unsecured alternatives
- Flexible use of funds for any purpose
- Land collateral won’t displace you from an existing home
Cons
- Smaller loan amounts and higher rates than home equity
- Risk of losing your land if you default
- Tapping equity reduces your ownership and future borrowing power
- Vacant land appeals to a smaller pool of lenders
- Lenders view land as riskier collateral than a standing home
Think carefully before putting up land that you don’t want to lose. Only pledge land collateral if you’re certain you can repay the loan.
Requirements to Use Land as Collateral
Qualifying for a land collateral loan has strict requirements:
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Enough equity – You’ll need at least 50% equity, up to 100% for vacant land.
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Clear title – No existing liens or claims can be on the land.
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Favorable appraisal – The land must appraise high enough to support the loan amount.
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Good credit – Minimum scores around 650, but 720+ is ideal.
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Stable income – Documented income to comfortably afford the new payment.
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Low debt-to-income ratio – Many lenders cap maximum DTI around 40-50%.
Meeting these standards proves you’re qualified and the risk of default is low. Expect a lengthier approval process than home equity loans.
Is Using Land as Collateral a Good Idea?
Whether pledging land collateral is wise depends on your specific situation:
Good situations for land collateral loans:
- You have significant equity in the land
- The funds meet important needs like debt consolidation
- You don’t plan to build on or sell the land soon
Riskier situations for land collateral loans:
- Your land equity is minimal
- You have other high debts and expenses
- You may sell the land in the near future
- You plan to build on the land within a few years
Only you can decide if the benefits outweigh the risks. Take time to consider all angles before moving forward.
Frequently Asked Questions
Can I get a personal loan using land as collateral?
Yes, some lenders will approve a personal installment loan with land as collateral. This allows you to borrow a lump sum and repay it over time.
What is the loan process like using land as collateral?
The process resembles a mortgage. You’ll complete an application, the lender will appraise your land, and you’ll undergo credit and income verification. If approved, you’ll get a loan offer to accept the terms.
What documents do I need to provide?
Be prepared to supply proof of land ownership (deed, title, purchase agreement), tax assessments, maps/surveys, appraisals, income documentation, and bank account info.
Can I use land I’m still paying off as collateral?
Yes, you can take out a second loan pledging land you have equity in but haven’t paid off completely. However, qualifying will be harder and puts your land at greater default risk.
What types of lenders offer land collateral loans?
Smaller community banks and credit unions familiar with your local land values are your best options. Large national lenders less commonly accommodate land collateral.
How much money can I borrow against my land?
Loan amounts depend on your equity, land value, and the lender’s policies. A common loan-to-value ratio banks use is 50-65%. But vacant land often limits lending to 50% LTV or less.
The Bottom Line
Using vacant land or lots as loan collateral opens creative financing options. But stringent requirements and risks of losing your land make it an option only suitable for certain borrowers. Do your homework and evaluate all aspects before pursuing a land collateral loan.
Land equity loans vs. home equity loans
| Land equity loans | Home equity loans | |
|---|---|---|
| Collateral type | Land only | Home and land |
| Loan terms |
|
Up to 30 years |
| Equity needed | 65% to 85% LTV or less | Up to 100% LTV |
| Types of lenders offering loans | Credit unions and niche lenders | National lenders |
Land equity loan requirements
The exact amount of equity you need varies by lender. The maximum LTV ratio is typically between 65% to 85%, depending on the type of land and the intended use of the funds. That means you’d need to maintain between 15% and 35% equity.
Lenders use your debt-to-income (DTI) ratio to evaluate what you can afford to borrow. Each lender will set its own limits, but you can expect that most will cap your DTI ratio at 43% or less.
Lenders can also set their own credit score minimums, but if you’ve got a credit score under 620, you may struggle to find funding.
Land equity loans tend to have shorter loan terms, but they vary significantly by lender. Typically, loan terms are about 10 to 12 years.
Some lenders may have a maximum loan amount, like $50,000. Others may not have a maximum loan amount as long as you’re at or below the maximum LTV ratio. Still, keep in mind that lenders typically lend less for vacant land, like a parcel in the woods with nothing on it, than land that has been slightly developed or has some infrastructure.