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 a great financing option if you own property, but don’t have the cash on hand for a big purchase or project. Putting up land as collateral allows you to tap into the equity you’ve built while getting access to funds at competitive interest rates compared to unsecured loan options.
In this comprehensive guide we’ll cover everything you need to know about using land as collateral for a loan. Here’s what we’ll discuss
- What is a land collateral loan?
- How does using land as collateral work?
- What types of loans allow land as collateral?
- What are the requirements to use land as collateral?
- What are the pros and cons of using land collateral loans?
- Frequently asked questions
Let’s get started!
What is a Land Collateral Loan?
A land collateral loan is a loan that is secured using land you own as the collateral. Collateral is an asset that guarantees the loan. If the borrower stops making payments, the lender can seize the collateral to recoup their losses.
With a land collateral loan, if you default, the lender could foreclose on your land. But on the plus side, putting up collateral allows you to qualify for more favorable loan terms.
Your land serves as extra incentive for the lender to work with you since they don’t want to take ownership of the property. Lenders feel more confident issuing loans when the borrower has skin in the game.
How Does Using Land as Collateral Work?
Here’s a quick rundown of how land collateral loans work:
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You apply for a loan and offer up land you own free and clear as collateral.
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The lender assesses the market value of your land and determines the loan-to-value ratio (LTV).
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If approved, the lender places a lien on the property during the life of the loan.
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You make regular payments over the loan term. As you pay down the principal, your equity builds.
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Once repaid in full, the lien is removed from the land and your ownership is no longer encumbered.
If you fail to make payments, the lender can foreclose and take ownership of the land to recover their losses based on the initial LTV.
What Types of Loans Allow Land as Collateral?
You have several options when using land as collateral for a loan:
- Land Equity Loans – Tap equity in land you own free and clear.
- Land Equity Line of Credit – Access a revolving credit line backed by land equity.
- Cash-Out Land Refinance – Pay off an existing land loan and take cash out.
- Land Purchase Loans – Use the land you’re buying as collateral.
- Construction Loans – Build on land you already own free and clear.
- Land Improvement Loans – Fund improvements to land you own.
Land equity loans and land purchase loans are the most common types of land collateral loans. But you can also use land as collateral for a HELOC, personal loan, or business loan if the lender allows it.
Construction loans are a short-term option for those looking to build on owned land, while land improvement loans fund upgrades to make your property more usable.
The type of loan you choose depends on what you’re looking to accomplish with the funds.
What are the Requirements to Use Land as Collateral?
If you want to use land as collateral, there are some requirements to be aware of:
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Equity – Most lenders require at least 20-30% equity in the land used as collateral.
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Loan-to-Value – Expect maximum LTVs of 65-85% depending on the lender.
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Credit Score – You’ll likely need a 620+ FICO score for approval.
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Debt-to-Income – Your DTI will need to be below 43% in most cases.
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Land Value – The land must appraise high enough to support the loan amount.
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Title – You’ll need clear title with no existing liens on the property.
Meeting these requirements demonstrates you’re likely to repay the loan and gives the lender recourse if you default. Strong finances and equity are key.
Pros and Cons of Using Land Collateral Loans
Let’s look at some of the top advantages and disadvantages of using land as collateral for a loan:
Pros
- Competitive interest rates
- Larger loan amounts
- Long repayment terms
- Tap equity without selling land
- Funds can be used for any purpose
- Build credit through on-time payments
Cons
- Risk of foreclosure if you default
- Closing costs and fees
- Reduced flexibility if you need to sell
- Variable rates may increase payments
- Need to maintain insurance coverage
As you can see, land collateral loans offer borrowing power and flexibility. But you take on some risk, so make sure you’re comfortable with the loan terms and your ability to repay before moving forward.
Frequently Asked Questions
Here are answers to some of the most common questions about using land as collateral for a loan:
How much equity do you need in land to use it as collateral?
Most lenders want to see you maintain at least 20-30% equity in the land used as collateral. The more equity you have, the better.
Can you use land you are buying as collateral for the purchase loan?
Yes, land purchase loans allow you to buy the land and use it as collateral all in one transaction. You’ll need a down payment of 10-25% in most cases.
What types of lenders offer loans with land as collateral?
Small community banks, credit unions, and niche lenders are often good options for land collateral loans. But some larger lenders like Wells Fargo also offer these loan products.
What happens if you default on a loan with land as collateral?
The lender can foreclose on the land used as collateral to recoup their losses. This could mean the loss of a significant asset, so only pledge land if you’re confident in your ability to repay.
Can land be used as collateral for a business loan?
Yes, some lenders allow business owners to use land they own as collateral for a commercial loan if other qualifications are met.
How much can you borrow against land equity?
It depends on the value of your land and the lender’s policy, but you may be able to borrow up to 85% of the market value. With significant equity, loans over $100K are possible.
The Bottom Line
Using land as collateral opens up options if you need capital but don’t want to sell your property. Make sure you understand the risks and requirements before pursuing this type of financing. But for many landowners, land collateral loans can provide the funding they need on agreeable terms.
Just be cautious not to overextend yourself and monitor variable rates closely over the life of the loan. As long as you borrow conservatively and make payments on time, using land equity as collateral can be an effective way to access financing while retaining ownership of your property.
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.
Pros and cons of a land equity loan
| Pros | Cons |
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Flexible funds. You can use the funds for any purpose. Interest options. You can choose a fixed- or adjustable-rate loan. Longer loan term options. You can find a longer repayment period than a personal loan offers. Competitive rates. You can access interest rates lower than unsecured loans offer. |
Must be secured. You have to put land up as collateral, which means you could lose the land if you default. Requires equity. Your lender may require you to have a significant amount of equity. Funds may be limited. You’ll have less buying power if the land doesn’t have essential infrastructure like water, electricity, or roads. Higher rates. You’ll have to pay more in interest than you would for a loan secured by a home. |