Can You Borrow Against Vacant Land?

by Tim Grant, Demand Media
    Borrowing against vacant land can often be a challenge.

    Borrowing against vacant land can often be a challenge.

    Banks are a lot more cautious about accepting vacant land as collateral for a loan than they are when they can loan against a finished building, but that doesn't mean they won't do it. Whether you can borrow against vacant land or not all depends on how much the land is worth and how much you want to borrow. Another big factor is the appreciation potential of the land itself. If you want to borrow against prime vacant land in the heart of New York City, bankers will compete against each other to give you the lowest interest rate possible. But, on the other hand, if you are trying to borrow against vacant land located in a remote area of Mississippi with no easy road access, that is not the kind of property banks will want as collateral.

    Vacant Land

    Vacant land is land that it is not actively being used, but may have some improvements already in place -- unlike raw land. But vacant land and raw land have an important thing is common, which is that most major banks tend to shy away from lending money against property that is not being used. You will have a better chance of borrowing against vacant land by going to a private lender who is familiar with the area the land is located in and has some idea of its potential value. Vacant land is more risky for banks than lending for a mortgage. A borrower could run into financial trouble and walk away from the loan leaving the lender with a vacant piece of property that may not be easy to resell.

    Use of Funds

    Land lenders are far more inclined to loan money against vacant land if the proceeds from the loan will be used to make the vacant land more valuable. If you own a $500,000 piece of vacant land and want top borrow $300,000 to install utility services to the property, the lender would use the $800,000 value in the loan-to-value calculation, which greatly increases the chance of approval. But if someone paid $100,000 for a piece of property which increased to $250,000 in value and wants to borrow $150,000 against it to pay off credit cards and other personal debt, banks would be less eager to grant the loan. The second scenario would be considered riskier because the owner has made no effort to increase the value of the land and none of the loan proceeds will be used to increase its value.

    Loan Limits

    You are probably not going to be able to borrow the full value of what the vacant land is worth. The value of the land could fluctuate and the bank does not want to value to fall below the loan's outsbaidng balance. Some lenders may let you borrow against as much as 85 percent of the land value while others will grant only 35 percent. The bank also determine your loan limit by take a close look at your financial picture -- credit record and income -- to assess your ability to repay the loan.

    Higher Rates

    Your interest rate for borrowing against vacant land will be higher than what you would pay for borrowing against equity in an occupied house. Loans against borrowed land can carry interest rates of 15 percent or more in some cases, as of 2012, simply because of the higher risk that banks assume. You will need a credit score of at least 700 to improve your odds of loan approval. Land loans typically have maturities of 10 to 15 years.

    About the Author

    Tim Grant has been a journalist since 1989 and has worked for several daily newspapers, including the Charleston "Post & Courier," the "Savannah News-Press," the "Spartanburg Herald-Journal," the "St. Petersburg Times" and the "Pittsburgh Post-Gazette." He has covered a variety of subjects and beats, including crime, government, education, religion and business. He graduated from The Citadel with a Bachelor of Science in business administration.

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