Using land to secure a loan is totally possible, but it can often be an uphill battle. Especially during uncertain economic times or shaky mortgage landscapes, lenders are a risk-averse lot, and – compared to more common collateral like vehicles or business assets – land is something that borrowers may be more likely to let go of if they can't pay back their loans. It can also be difficult for lenders to repossess.
Don't lose hope just yet. With a multi-faceted approach featuring the right type of loan, the right type of lender and proper preparation, you and your property can – excuse the pun in advance – absolutely land a solid loan.
Target a Specific Type of Loan
If your land is vacant, lenders may consider it an especially unattractive security. In this case, your vacant lot is most likely going to help secure you a construction loan. This type of loan caters to the one-time need of homebuilding, typically requiring repayment six to 12 months after financing, when your home is complete.
Commonly, up to 80 percent of your land's equity plus the cost of construction determines the amount of money for which you're eligible. Remember, though, that even if you don't complete the building process, you're still required to repay the loan.
On the other hand, a land-equity loan or line of credit is a little more flexible. This lump sum loan, offered with fixed or variable interest rates depending on the lender, can be used however you'd like. It works much like any other secured loan, with installment payments that combine principal and interest and a loan amount determined by your actual equity or land value. Just keep in mind that the amount will be lower than either of these figures.
Choose the Right Lender
Credit unions, private lenders and smaller local banks are often more likely to provide land-secured loans than larger banks, especially if your land is vacant. Speaking to the Washington Post in 2017, Paul Noring, a managing director of the financial risk-management practice at Navigant Consulting, said, “For consumers, it doesn’t really matter whether you get your loan through a bank or a non-bank, although in some ways non-banks are a little more nimble and can offer more loan products."
If you're using land that includes the home in which you live as collateral, your borrowing possibilities open up to more plentiful traditional options like personal loans, secured loans, small business loans, home-equity loans and consolidated loans.
Using your home to secure a loan is more desirable for the creditor but riskier for you. Always find the lowest APR possible and make absolutely certain that you'll be able to afford the loan payment for the long haul, lest you risk losing your home.
To increase your chances of netting a loan using your land as collateral, it's vital to have a battle plan before filling out that loan application. Of course, a healthy credit score and having well-located, easily accessed land that you own outright and that's already hooked up to utility services won't hurt your chances, either.
For a construction loan, find an agent who isn't affiliated with the builder; this helps buffer you against the builder's interests and can put a valuable outside negotiator in your corner. For any type of land-secured loan, make sure you have in hand proof of a professional appraisal, your property deeds and land surveys, as well as the usual financial statements, bank statements, proof of income, ID, tax returns and current loan or lease agreements.
- Madison Homebuilders: Using Land as Collateral for a Construction Loan
- Redfin: How Do Construction Loans Work?
- Debt.org: Types of Consumer Credit & Loans
- Federal Trade Commission: Using Your Home as Collateral
- The Washington Post: The Mortgage Market Is Now Dominated by Non-Bank Lenders
- APRfinder: Land Equity Loan Options for Vacant Landowners
- SCORE Association: The Documents You Need When Applying for a Loan
Dan's decade-long experience as a freelance writer and small business owner has seen him contribute to financial publications including Chron.com, Zacks.com, MSN Money, Fortune, Motley Fool and others.