Can You Get an Equity Loan on Land?

Owning land can provide you with financial opportunities that you may not have realized. If you own land free and clear, meaning you don’t have an outstanding mortgage or lien on the property, you likely have equity that you can leverage to access cash. But what if you still owe money on the land? Can you tap into your land equity even if you haven’t fully paid off the loan you used to purchase the property?

The short answer is yes, you can get an equity loan on land in many cases, even if you haven’t paid it off completely. However, there are some important factors to consider when pursuing a land equity loan.

What is Land Equity?

Before diving into the details of land equity loans it’s important to understand what equity is when it comes to land.

Land equity refers to the value of the land itself, minus any debts or liens secured by the property. For example, if you purchased land for $100,000 and you still owe $60,000 on the original purchase loan, your equity would be $40,000 ($100,000 current value – $60,000 owed = $40,000 equity).

Equity builds over time as you pay down the loan principal and as the land value potentially appreciates And equity gives you leverage to tap into your land ownership in different ways, including through equity loans.

How Do Land Equity Loans Work?

A land equity loan utilizes your built-up equity as collateral to provide you with a lump sum of cash now. It works similarly to a home equity loan, except it is secured by land instead of a residential property.

With a land equity loan you borrow against a percentage of your equity. The loan is secured by the land, meaning if you default the lender can seize the land to recoup their losses.

Here are some key features of land equity loans:

• Loan Amount: Lenders will typically lend 50% to 85% of your equity, depending on the lender policies. The more equity you have, the more you can potentially borrow.

• Interest Rates: Expect interest rates around 1.5% to 2.5% higher than residential mortgage rates. Rates vary by lender.

• Repayment Term: Most land equity loans have shorter terms of around 10 to 15 years.

• Collateral: The land itself secures the loan, so proper appraisal is crucial.

• Uses: Land equity loan proceeds can be used for any purpose – debt consolidation, home improvements, college tuition, starting a business, etc.

• Credit Score: Requirements vary, but credit scores of 680+ are generally preferred.

• Debt-to-Income Ratio: Lenders will assess your DTI to ensure you can afford the new loan payment. Requirements vary.

Can You Get a Land Equity Loan if You Still Owe on the Original Purchase Loan?

This is where land equity loans differ from home equity loans. With a home, you can generally get a second lien equity loan even if you still have the original mortgage. But most lenders will not do a second position loan on land.

Their rationale is that raw land is riskier collateral than a developed property. So they want the assurance that their loan will get first priority if you default.

That means in most cases, the original land purchase loan must be paid off as part of the new land equity loan transaction. The good news is you can likely accomplish this with a cash-out refinance structure.

Here’s how it would work:

1. You currently owe $60,000 on your original $100,000 land purchase loan.
2. The land is now worth $150,000.
3. You want to tap $30,000 of equity but still owe on the first loan.
4. You do a cash-out refinance for $90,000. This pays off the $60,000 original loan and provides you with $30,000 cash in hand.
5. The new lender now has first lien position on the property.

What Are the Qualification Requirements for Land Equity Loans?

As mentioned above, land equity lenders will have stricter requirements than a typical mortgage lender. Here are some of the key criteria they will evaluate:

• Credit Score: Minimum scores around 680+ are typical. Excellent credit will provide better rates/terms.

• Debt-to-Income: Your total monthly debt payments compared to gross monthly income. Requirements vary but 43% or lower is generally preferred.

• Loan-to-Value: The loan amount compared to the appraised land value. Expect maximum LTVs of 50% to 85%.

• Equity Position: Most want to see you have at least 20% to 35% equity already built up.

• Land Value: More equity may be lent on higher value land with income potential like farmland. Less equity lent on raw vacant land.

Meeting these requirements demonstrates you have the financial capacity to manage the new loan payment each month.

What Are the Pros and Cons of Land Equity Loans?

Tap into your land equity has advantages, but there are also risks to consider.

Potential Pros:

• Access significant funds quickly without selling the land
• Potentially lower interest rate than other loan options
• Flexible use of funds for any purpose
• Build credit by making regular loan payments

Potential Cons:

• Put your land at risk if you default on the loan
• Shorter repayment terms mean higher monthly payments
• Closing costs and fees apply to obtain the loan
• Prepayment penalties may exist depending on lender

Carefully weigh the pros and cons for your personal financial situation when deciding if a land equity loan is the right choice.

How Do You Find the Best Land Equity Loan Lender?

Land equity loans require finding a specialty lender, as typical banks and credit unions likely won’t offer these types of loans. Here are some tips for choosing the right lender:

• Search for lenders specializing in land loans and land equity loans.
• Look for an established lender with a strong reputation.
• Compare interest rates, fees, and terms among multiple lenders.
• Ask about their specific qualification requirements.
• Research online reviews from past customers.
• Ensure they have experience lending in your geographic area.

Taking the time to find the right lender can help ensure you get the best possible loan terms while using your land equity.

Final Thoughts on Land Equity Loans

If you need to access capital but don’t want to part with your land completely, a land equity loan can provide a viable option in many cases. You can tap into your built-up equity even if you still owe on the original land purchase loan, as long as you do a cash-out refinance.

Just be sure to find an experienced land equity lender, understand the risks, and triple check you can manage the new monthly payments comfortably. Used strategically and conservatively, land equity loans can be useful financial tools for land owners.