You can use equity you have in land in a number of ways, such as for collateral for a land equity loan. Learn about how land equity works and your options for leveraging equity in your property.
Pros and Cons of a Land Equity Loan
A land equity loan is similar to a home equity loan in that it allows you to tap the value of your property, but the lender secures the loan with land as collateral. With a land equity loan, you use a portion of your equity to guarantee a loan, which means the lender can seize and sell your property if you fail to meet the terms of the loan agreement. This is similar to a home equity loan, in which the lender uses your house to back a loan. The collateral lowers the risk of lending to you because the lender can recoup some or all of the losses they may face if you fail to repay your loan by selling your property.
Pros Explained
Access to funds: Land equity loans can be used for any purpose, much like a personal loan. They can help cover expenses such as tuition, bills, and other expenses, and can also be used to purchase a home or consolidate debt.Lower interest rates: Interest rates for land equity loans are typically lower than an unsecured loan since collateral is included. These loans can have either fixed or variable options, depending on the lender.Alternative to home equity loans: Another benefit of using a land equity loan is that it allows you to take out a loan without risking other assets such as a home, car, stocks, or savings account.
Cons Explained
Risk of losing land: When you use an asset as collateral, you take the risk that the lender could take it if you fail to meet the terms of the loan. With a land equity loan, your property is at risk of foreclosure if you default.Not all lenders offer land equity loans: Only some banks or credit unions offer land equity loans. They are not as common as home equity loans.
Using Land Equity for a Mortgage
Land equity sometimes can be used as collateral to qualify for a mortgage. In this case, you would need to own the land on which you are building a new home. If you use land equity as down payment, the lender may require you fully own the land and not have outstanding debt on it. Typically, 20% of the price of the home is required for a down payment for many lenders, although some programs may have lower requirements, such as the Federal Housing Administration’s FHA loan, which requires 3.5%.
Applying for a Mortgage Using Land Equity
The process of applying for a mortgage with land equity is similar to the process for applying for other loans. The basic steps include:
Finding a lender that will allow land equity as a down paymentDetermining your preferred terms for the mortgage and lender’s requirementsChecking or improving credit score and determining debt-to-income ratioGetting an appraisal of the land to determine its value as collateralGathering any other income or financial documents necessarySubmitting an application for the mortgage
How To Get a Construction Loan With Land Equity
A construction loan is a type of loan used to finance the construction of a new house. It’s different from a mortgage because it focuses on the construction process, while a mortgage typically is used for a house that already has been built. It works in a similar fashion as a line of credit in that the lender provides the funds in increments as the construction progresses. Typically, the process of getting a construction loan is similar to getting a mortgage. Some construction loans even allow the loan to convert into a mortgage once the construction stage is complete. Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!
