Building your own home is the perfect opportunity to create your dream oasis. You get to choose the style, the size and whether you have a wrap-around porch and other features. But financing home construction can be difficult. If you already own the land that you are going to build on, you may be able to use your land title as collateral for a loan to cover the cost of construction.
Understanding Collateral in Lending
Many loans require that the borrower provide collateral. Collateral is an asset that the borrower owns and is willing to relinquish to the lender if they default on the loan. The lender and borrower enter a contractual relationship that allows the lender to take possession of the collateral if the borrower stops making the required loan payments. The collateral can then be used by the lender to pay off the debt owed by the borrower.
If the borrower doesn't default, the lender's interest in the property title will end when the borrower pays off the total amount of the loan.
Using Land as Collateral
The land you own can be used as collateral to assure your lender that they will have a remedy if you default on your loan. You will need to know the value of the land and be able to show proof of ownership in the form of a land title in order for a lender to consider accepting your land as collateral. Not all lenders accept land as collateral, so it is important to find lenders who do.
Once you reach an agreement with a lender to use your land as collateral, they will issue you a loan and record a lien on your land title. If you default on the loan, the lender can legally take possession of the land and sell it to remedy the default.
Using Your Loan for Construction
Once your loan using your land title is approved, you can use the loan to construct your new home on your land. The money can be used as you see fit, including on necessities like construction materials, improvements to the ground or soil and cosmetic or landscaping upgrades.
Just like any loan, a loan secured with your land title as collateral must be paid back according to the terms agreed upon on your loan contract. When you pay back the full amount of your loan, the bank will cancel the lien on your property title, and the lender will no longer have any claim to the land you used as collateral.