How to Use Land as Collateral

Empty parcels of land can sometimes be enough to offset loan risk.

Empty parcels of land can sometimes be enough to offset loan risk.

When taking a secured loan, lenders will ask for some form of collateral. Collateral is something of value that can be seized in case of non-payment to ensure the lender gets the funding back. In most cases, loans are issued on credit or on the item being financed like a mortgage. In some cases, however, land can be put up against the loan as a guarantee.

Provide your lender with proof of ownership for the land you wish to put up as collateral. This proves that the land is yours to put up in the first place. If other people own the land with you, they may also have to sign the loan paperwork to ensure the lender has the right to acquire the property in case of non-payment.

Allow your lender sufficient time to appraise the value of the property in question. This may involve a visit from a licensed, third-party real estate appraiser for properties and loans valued at more than $50,000. If the loan is valued over $250,000, the appraisal must be certified.

Undergo a review of the land deed to check for any existing liens or debts that may be attached. If other liens already exist on the property, the lender most likely will not accept the land as collateral.

Review the terms of the loan as offered by the lender. The type of real estate you put up against the loan will determine the amount you're offered. For example, land with an occupied residential property may bring up to 75 percent of its appraised value in the form of a loan. With property that's ready for building you may get 50 percent, and for vacant land you can expect around 30 percent.

Tip

  • Even if you request a loan for far less that the full value of the land in question, don't plan on taking another loan out on its remaining worth. Lenders typically won't allow any liens other than their own on the land used as collateral. If other creditors have claim to even some of its value, it decreases the return and the chances of full reimbursement for your lender.

Warning

  • The interest rate you're likely to pay on a loan with vacant land as collateral is far higher than it would be for other forms of guarantee. With points and interest you may be looking at 15 percent or more.

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