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Owning land can be a great investment. As the value of land increases over time you build equity that can provide financial opportunities. One way to access that equity without selling your land is through equity loans. Equity loans allow you to borrow against the value of your land.
In this comprehensive guide, we’ll explain everything you need to know about equity loans on land, including:
- What is land equity and how equity loans work
- Types of equity loans for land
- Pros and cons of equity loans
- Tips for getting approved
What is Land Equity and How Do Equity Loans Work?
Equity refers to the value of an asset beyond what is owed on it For land, equity is calculated as
Land Value – Loan Balance = Land Equity
For example, if your land is worth $100,000 and you owe $50,000 on your original loan, your equity is $50,000.
With an equity loan, you can borrow against that equity. The land itself serves as collateral for the loan. If you default, the lender can foreclose and take ownership of the land.
Equity loans provide funds you can use for any purpose – debt consolidation, home improvements, medical bills, etc. You make fixed monthly payments over a set repayment term. Interest rates may be fixed or adjustable.
Lenders typically require at least 20-30% equity before approving a loan. Loans amounts are capped at a percentage of your equity, such as 80%. This protects the lender in case land values decline.
Types of Equity Loans for Land
There are a few types of equity loans available for land owners:
Land Equity Line of Credit – This works like a credit card. You’re approved for a revolving credit line up to a certain limit and can draw funds as needed. You only pay interest on what you actually borrow.
Cash-Out Refinance – You take out a new loan for more than what you currently owe and pocket the difference in cash. This converts equity into cash while potentially lowering your rate/payment.
Construction Loan – Some lenders will allow you to use equity as a down payment on a construction loan to build on the land. This avoids costs of a traditional down payment.
Land Equity Loan – This is a term loan that provides a lump sum of cash upfront. You repay the loan with fixed monthly payments over a set number of years.
Pros and Cons of Equity Loans on Land
Equity loans provide a way to access your land’s value, but also come with some drawbacks:
Pros
- Access cash without selling land
- Potentially lower rates than other loans
- Use funds for any purpose
- Build credit by making on-time payments
Cons
- Land is at risk if you default
- Limited borrowing power compared to home equity
- Rates/fees may be higher than traditional loans
- Need 20-30% equity to qualify
As with any loan, be sure you can comfortably afford the payments to avoid putting your land in jeopardy. Shop rates to find the best loan terms.
Tips for Getting Approved for a Land Equity Loan
Since land lacks structures like a home, lenders view equity loans as higher risk. You’ll need to put your best foot forward to get approved. Here are some tips:
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Have at least 20-30% equity – Most lenders require this minimum to even consider a loan. Higher equity boosts your chances.
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Own the land free and clear – No existing mortgages or liens substantially reduce risk for lenders.
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Good credit scores – Minimum scores of 660+ help your odds. Higher is better.
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Low debt-to-income ratio – Lenders want to see you have the capacity to handle new loan payments comfortably.
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Cash reserves – Money in the bank proves you can cover emergencies that might otherwise jeopardize loan repayment.
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Recent land appraisal – This provides lenders an accurate assessment of your equity to base lending decisions.
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Limited recent loan applications – Too many credit inquiries and applications can raise red flags about your creditworthiness. Apply selectively.
Taking steps to boost your financial profile can go a long way towards getting approved, even if your situation isn’t perfect.
How Much Can You Borrow Against Land Equity?
Loan amounts are capped as a percentage of your equity. Typical maximums include:
- Lines of Credit – Up to 85%
- Cash-Out Refinance – Up to 80%
- Construction Loans – Varies based on project costs
- Term Loans – Up to 65%
So if you have $100,000 in equity, you may qualify for around $65,000 – $85,000 depending on loan type.
Lenders want sufficient equity remaining as a buffer so they don’t end up “upside down” on the loan if values decline.
What is the Process for Getting a Land Equity Loan?
The loan process involves these primary steps:
1. Determine your equity – Get a recent appraisal showing current market value and calculate equity based on any liens against the land.
2. Check eligibility requirements – Each lender has its own underwriting policies. Review guidelines to see what’s required.
3. Compare lenders and loan options – Shop different lenders and loan types to find the best fit for your needs and financials.
4. Apply for financing – Submit your loan application and supporting documents so the lender can verify your information.
5. Get approved – The lender reviews your application and makes an approval decision. You may need to provide more information.
6. Close on the loan – Approved loans proceed to the closing process. You sign documents and receive your funds.
Be thorough upfront to avoid hiccups or surprises during the loan process. Patience and persistence pay off.
Where Can You Get a Loan Against Land Equity?
You have several options for obtaining equity financing:
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Local banks and credit unions – These traditional lenders sometimes offer equity loans, especially in rural areas.
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Online lenders – Companies like LendingTree and Lightstream provide equity loans with online applications.
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Mortgage brokers – Brokers can shop wholesale lenders for you and compare quotes.
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Alternative lenders – Hard money and private money lenders may finance equity for short terms or when banks decline.
Work with a reputable lender that understands equity lending. Niche lenders that specialize in land may offer better rates and service.
What is a Typical Interest Rate on Land Equity Loans?
Equity loans carry higher interest rates than traditional mortgages – often 2-3% higher for prime borrowers. Rates with top lenders may be:
- Lines of Credit – 6% – 10%
- Term Loans – 8% – 12%
- Cash-out Refinance – 7% – 11%
Lower rates go to applicants with pristine credit, higher equity, and low debt-to-income ratios. Weaker applicants get hit with higher rates. ARM loans start with teaser rates that later adjust upward.
Compare rates across several lenders to uncover the best deals available for your specific financial profile. Small differences in rates can have a big impact on total costs.
What Loan Terms are Available for Land Equity Loans?
Equity loans typically have shorter repayment terms than traditional mortgages:
Lines of Credit – Often 10 years interest-only, then principal + interest payments on a 10 – 15 year term.
Term Loans – Most have 5, 7, or 10 year terms. 15 years possible with strong profile.
Cash-Out Refinance – Usually a 15 or 30 year term.
Construction Loans – 1 year term to build. Then land equity repays or converts to traditional mortgage.
Avoid very short terms unless you plan to sell or pay off the loan quickly. Longer terms spread repayment over more time for lower monthly payments. But you pay more interest.
What Are Some Alternatives to Equity Loans?
If you’re having trouble qualifying for an equity loan, here are a few options to consider:
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Home equity loan – Borrow against your primary residence if applicable
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Personal loan – Unsecured loans up to $40,000 are available if creditworthy
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Business line of credit – Use equity in a business you own to secure funds
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Private lenders – Asset-based loans from individuals provide alternative financing
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Sell a parcel – Split larger land into parcels and sell one for cash
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Lease land – Earn income by leasing land for farming, cell towers, billboards, etc.
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Sell timber rights – Get paid for the value of merchantable wood on wooded land
Explore all avenues before pursuing high-cost alternatives like payday loans or vehicle title loans. Friends an
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Using a home equity loan to buy land
When you take out a home equity loan, also known as a second mortgage, you’re borrowing money against the equity you’ve built up in your current home. That means that your home is collateral for the loan. If you don’t repay it, you could lose your home to foreclosure — a risk not to take lightly.
You can use the funds from a home equity loan for any purpose: buying the land, hiring an architect, engaging a general contractor. Depending on the loan term, you might have as much as 30 years to repay the debt with interest, similar to a 30-year mortgage for a home purchase.
Another option is to use a home equity line of credit (HELOC). Using a HELOC to buy land also means borrowing against the equity in your house, but instead of a lump sum, you get a revolving line of credit — one that refreshes as you pay back what you borrow. This could allow you to borrow to buy the land, repay that sum, and then borrow again to fund the actual construction, for example. You could even buy the land with cash, wait until you accrue enough equity in your home, and then use that to establish a HELOC to develop the property.
If you want a lump sum to work with, though, skip the HELOC and pursue the home equity loan to buy land.
Land Equity towards Construction Costs!
FAQ
Is it hard to get equity loan on land?
Can I borrow money with my land as collateral?
What credit score is needed for land equity loan?
Can you use a HELOC for land?
What is a land equity loan?
Equity is the difference between the amount owed on the land (if any) and the land’s value. The land acts as collateral; if you were to default on your land equity loan, the lender could take the land to recoup losses. Land equity loans may be more readily available for more significant land acreage.
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.
Can you get a land equity loan for vacant land?
Instead, most land lenders cap equity loans for vacant land at 35% of the property’s value. In some cases, you may be able to acquire a land equity loan for a higher portion of equity, but you will likely face higher interest rates and additional closing costs as a result.
Where can I get a land equity loan?
Online Lenders: With the rise of online lending platforms, borrowers can explore land equity loan options from online lenders that specialize in real estate and land-based financing. Online lenders may offer streamlined application processes and quick access to funds, making them a convenient option for individuals seeking land equity loans.