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.
Getting approved for a loan when you have bad credit can feel impossible Your low credit score likely shuts you out of options like credit cards or personal loans from traditional lenders But what if you have significant equity built up in a piece of land you own? Can you leverage your land equity to get funding even with bad credit?
The short answer is yes, you may be able to qualify for a land equity loan with bad credit. However, it’s important to understand exactly how these loans work, what criteria lenders use, and what your alternatives are if your credit simply won’t cut it.
What is a Land Equity Loan?
A land equity loan works similarly to a home equity loan. The equity you have built up in the land through price appreciation or by paying down your land loan serves as the collateral. The lender will place a second lien on the land behind any existing mortgages. You can then use the loan proceeds for almost any purpose – debt consolidation, home improvements, school costs or even investing in more land.
Land equity loans come in several forms:
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Cash-out refinance: You take out a new loan for more than what you currently owe and use the extra funds as you wish. This combines your old land loan and the equity loan into one new loan.
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Home equity line of credit (HELOC): This gives you a revolving line of credit to use as needed. You only pay interest on what you actually use.
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Straight equity loan: This provides you with a lump sum upfront that you repay with fixed payments over a set term.
No matter the type, land equity loans put your property at risk if you default. The lender can foreclose and force a sale to recoup their money.
What Credit Score is Needed for a Land Equity Loan?
The credit score lenders look for depends on the lender you apply with. Here are some general guidelines:
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Prime lenders: Banks and credit unions often want 620 or higher. National lenders that securitize and sell loans may require 660 or higher.
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Subprime lenders: Online lenders and mortgage brokers that specialize in bad credit lending can go as low as 580 or 550. Some may approve borrowers with scores below 500 with strong compensating factors.
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Peer-to-peer lending: These platforms match you directly with investors. Each investor sets their own criteria, but some may accept credit scores under 500.
In addition to your score, lenders look at your entire credit profile. A history of late payments, collections, judgments, or bankruptcies can jeopardize your approval chances even if your score has recovered. Providing explanations for past credit issues can help.
Factors Other Than Your Credit Score
Reputable lenders base decisions on more than just your credit score. Here are some other factors that can help you get approved for a land equity loan with bad credit:
Equity level – Most lenders cap land equity loans at 65-85% loan-to-value (LTV). In other words, you need at least 15-35% equity. The more equity you have, the better. Some lenders may approve higher LTVs for those with low scores.
Loan purpose – How you plan to use the funds can sway an approval decision. Using it to make improvements that boost the land value is ideal. Debt consolidation is OK too. Avoid uses that don’t build equity like vacations or electronics.
Income and assets – Lenders want to see you can afford the payments. Expect to provide tax returns, bank statements, and possibly profit/loss statements if you are self-employed.
Payment history on land loan – Perfect payment history on your existing land loan is a plus. Recent late payments could require explanation.
Length of land ownership – Longer ownership indicates you are unlikely to walk away from the property and default. Some lenders may require you to have owned it for 2-5 years minimum.
Land value and marketability – Raw rural land will get less financing than a developed lot in a popular area. Land in a hot real estate market is best.
Lenders will weigh all these factors to determine if the risk of lending to you is acceptable. Be prepared to highlight your strengths across each area.
Lenders to Consider for Bad Credit Land Equity Loans
If your credit is poor, here are some options to consider:
Local banks and credit unions – Smaller community institutions are often more flexible than big banks. They know the local land values well. Expand your search beyond banks where you have existing accounts.
Mortgage brokers – A broker shops your application to multiple lenders. This exposes you to lenders you may not find on your own. Brokers have relationships to help get challenging loans approved.
Online lenders – Lender websites like LendingTree allow you to complete one application then receive offers from multiple lenders. This simplifies the process of finding a lender that will approve you.
Peer-to-peer lending – Sites like LendingClub connect you with individual investors willing to fund loans the traditional banks turn down. Each investor chooses their own criteria.
Asset-based lenders – These lenders focus on the asset rather than your credit. They may accept lower scores and higher LTVs but charge higher rates and fees.
Loan service companies – These lenders often act as mortgage servicers who collect payments on behalf of other lenders. They have direct access to their portfolio of loan products.
Subprime mortgage lenders – Lenders who specialize in financing for bad credit understand the challenges borrowers face. They are often more forgiving of past issues.
Shopping with multiple lenders maximizes your chances. Compare all offers carefully and negotiate the best deal possible.
Alternative Funding Options Beyond Land Equity Loans
If you simply can’t qualify for a land equity loan, even with bad credit, all hope is not lost. Here are a few other potential options to get funding:
Borrow from friends and family – For small amounts, private party loans from people you know may charge lower rates and have flexible terms. Draw up a formal loan agreement.
Pawn land promissory note – You get a loan by signing over a promissory note secured by the land as collateral. Risks are similar to land equity loans but approval is easier.
Crowdfunding – Borrow small amounts from multiple individual investors using a regulated crowdfunding platform. Max loan is $25k – $50k based on income.
Sell a partial interest – Find an investor willing to buy a partial interest in your land. They get a deed giving them ownership rights. You get funds but keep control.
Land business lines of credit – Some banks offer lines of credit using land as collateral to self-employed borrowers. These resemble small business lines of credit.
Hard money loans – Specialty lenders offer short term loans for those with land equity but challenged credit. Rates are high and terms are usually under 3 years.
Owner financing – If selling the land, you could offer the buyer owner financing yourself. This keeps you involved with the land while supplying funds.
HELOC on another property – If you have substantial equity in a home or other property, tap this equity instead through a HELOC.
Asset-based business loans – Business lines of credit using land or equipment as collateral may provide funds even when your personal credit is poor.
Accounts receivable financing – If you have outstanding invoices with payments pending, you can get immediate funds at a discount of the invoice amounts.
Merchant cash advances – These advances against future credit card sales help business owners get quick financing approval. Payback is through a percentage of sales.
Tips to Get Approved for a Bad Credit Land Equity Loan
If your credit score is under 600, here are some tips that can help you successfully get approved:
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Check your credit reports – Ensure there are no errors dragging down your scores. Dispute any mistakes.
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Pay down revolving balances – Lower credit card balances can bump up your scores quickly. Even just 10% lower utilization helps.
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Get current on all accounts – Bring any past due accounts up to date if possible. Lenders will see this.
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Explain past credit issues – Draft a letter explaining any late payments, collections, or other dings. Emphasize it was a one-time event not likely to recur.
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Have tax returns handy – Be ready to share returns for the last 2 years to document your income stability.
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Gather land details – Have the deed, land records, appraisal or comps, and surveys handy to support the land value.
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List planned improvements – If you plan to build or develop the land, note this in your application. It shows a wise use of funds.
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Bring proof of insurance – Lenders want to see structures and liability covered with adequate insurance policies.
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Know the property tax status – Delinquent taxes raise red flags. Ensure taxes are current before applying.
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.
What defines a land equity loan?
Land equity loans are similar to home equity loans, except your land is used as collateral instead of your house. The land may be raw without any improvements, or it may have some infrastructure in place, like electric and water lines. A person taking out a land equity loan may own the land outright or have a land loan, which is like a mortgage for a piece of land.
Is it Hard to get a HELOC? – Minimum Requirements and How to Get Approved
FAQ
What credit score is needed for land equity loan?
Is it hard to get equity loan on land?
What is the lowest credit score for a land loan?
Can you get a equity loan with bad credit?
Can I get a home equity loan with bad credit?
However, you may still be able to qualify for a home equity loan with bad credit. Since home equity loans are secured by your property, meaning your home serves as collateral if you default on the loan, there’s less risk to the lender. And it can help if your other financial qualifications are strong. 2. Calculate Your Monthly Debt-to-Income Ratio
What are land equity lines of credit?
Land equity lines of credit differ by lender, but may feature the following terms: Banks and credit unions may consider your equity as contributing to your down payment for a construction loan, provided you build a home on the land within a specific time period.
What can you do with a land equity loan?
You can use it to build a home on the property, pay down high-interest debt or cover unexpected medical bills. What defines a land equity loan? Land equity loans are similar to home equity loans, except your land is used as collateral instead of your house.
Should you get a land equity loan?
Regardless of the route you choose, most lenders are more apt to offer a land equity loan to individuals who own their large piece of land or small lot outright. With no other debt tied to the land, lenders see the property as a lower risk than if there is an outstanding mortgage or lien against it.