How to Use Land Equity Loans

Land equity is the value of the land you own, or the difference between the market value of the property and what you owe the lender. This is similar to home equity, but only applies to land.

You can use the 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 increasing equity in your property.

Key Takeaways

  • Land equity refers to the value of the piece of land you own, or the difference between its market value and what you owe the lender.
  • Land equity loans work similar to home equity loans, but only use land as collateral.
  • If you are building a house, you can use land equity as collateral for a mortgage or construction loan.

Pros and Cons of Land Equity Loans

Land equity loans are similar to home equity loans in that they allow you to capitalize on the value of your property, but the lender secures the loan with the land as collateral.

With a land equity loan, you use a portion of your equity to guarantee the loan, which means the lender can foreclose and sell your property if you fail to meet the terms of the loan agreement. This is similar to a home equity loan, where the lender uses your home to support the loan. Collateral lowers loan risk to you because the lender can cover some or all of the loss they may face if you fail to repay your loan by selling your property.

Using a land equity loan means you could lose your property if you fail to meet the terms of the loan.

Pros Explained

  • Access to funds: Land equity loans can be used for any purpose, such as personal loans. They can help cover expenses like college, bills, and other expenses, and can also be used to buy a house or consolidate debt.
  • Lower interest rates: Interest rates for land equity loans are usually lower than for unsecured loans because collateral is included. These loans can have 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 house, car, stock, or savings account.

Cons Explained

  • Risk of losing land: When you use an asset as collateral, you are taking on a risk that the lender can take 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 can sometimes be used as collateral to qualify a mortgage. In this case, you must own the land on which you are building your new house. If you use land equity as a down payment, the lender may require that you own the land completely and have no debt on it.

Typically, 20% of the home price 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%.

More commonly, land equity is used for construction loans, which can eventually turn into a mortgage once the house is built.

Applying for a Mortgage Using Land Equity

The process for applying for a mortgage with land equity is similar to the process for applying for other loans. The basic steps include:

  • Find a lender who will allow land equity as a down payment
  • Determine your preferred terms for mortgage and lender terms
  • Check or improve credit score and determine debt-to-income ratio
  • Obtain a land appraisal to determine its value as collateral
  • Collect income or other necessary financial documents
  • Submitting an application for a 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 is different from KPR because it focuses on the construction process, while KPR is usually used for finished houses. It works in the same way as a line of credit where the lender provides funds in stages as construction progresses.

Usually, the process of getting a construction loan is similar to getting a mortgage. Some construction loans even allow the loan to be converted into a mortgage after the construction phase is complete.

Frequently Asked Questions (FAQ)

How much equity is there in one acre of land?

Land equity is basically the difference in the value of the land and what you owe on it. Its value depends on the location of the land, zoning regulations, and whether the land is raw, uncultivated, or improved. Lenders value land in different ways.

How do land equity loans work when land is sold?

When the property used as collateral is sold, the remaining loan will be repaid with the proceeds. The property owner will then receive the remaining amount. If the sale of the property does not cover the loan, the owner will usually be responsible for paying off the loan immediately, as the land can no longer be used as collateral.

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