Can You Borrow Against Vacant Land?

When you think of loan collateral, your thoughts likely go to homes or home equity, cars, commercial equipment or even your 401(k). Chances are those thoughts don't often land on the parcel of empty land you inherited on the outskirts of town. Don't write off that little slice of green earth entirely. Though it's difficult to secure a loan based on vacant land, you can turn it into a slice of green money as loan security under just the right circumstances.

It's pretty common for lenders to be hesitant about accepting vacant land as collateral, and the reason for this aversion is simple: It can be a big risk for lenders. In the eyes of many lenders, the idea that you've made no improvements to increase the land's value may imply that the land is not held in high esteem by you personally, which also implies that it may be easy for you to walk away from it if you're unable to pay back your loan.

As such, it's not always easy to get land-secured loans. It can be especially difficult following negative changes in the mortgage landscape, which are liable to make lenders even more risk averse.

In a slightly ironic twist (who says the financial sector doesn't have a sense of humor?), you're most likely to secure a loan on your vacant land if you plan on making it not vacant anymore.

Many lenders will consider up to 80 percent of your land's equity plus the cost of planned construction to put a construction loan in your bank account, which often allows you to borrow up to 95 percent of the cost of construction for a new home, depending on your income, employment and credit history. You may even be able to get 100 percent with a little help from a guarantor. Alternatively, it's often possible to refinance your land to generate equity via an equity loan.

For construction loans in particular, the valuation of the land plays a big role in securing your loan. For the best outcome, you'll want land that's in a desirable location, connected to (or able to be connected to) utility services and easily accessible via well-maintained roads. It's also an immense help when you own the land outright, otherwise you face potentially reduced loan amounts.

Before you sit down with an agent, it's wise to have your property professionally appraised so that you know exactly how much it's worth. Be prepared to back up your appraisal with proof and provide documents such as deeds and land surveys in addition to ample proof of income. You may be more likely to get a land-secured loan from a small local bank, credit union or private lender, but the latter case often comes with higher rates. Always gather plenty of references before taking this route.