How to Use Vacant Land as Collateral for an Equity Loan

Land equity loans are more difficult to obtain than other forms of financing.

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With vacant land, you have money tied up in a property that you may have other uses for. In this case, an equity loan on that vacant land can allow you access to that capital. Land equity loans are not as readily available as home equity loans, and obtaining such a loan will have its own unique challenges.

Do the Research

Your lender may be hesitant to use vacant land as collateral for an equity loan. Since vacant land is not in use by the owner, lenders view it as too easy to walk away from if you cannot or do not want to pay. Contact many different lenders in order to find one that will give you this type of loan. If you own a home in addition to the vacant land, it is possible that the loan deal may be better for the lender if you offer to put up your home equity as collateral.

Own the Land

Because lenders will typically lend much less money for equity in land, it is best if you do not owe any money on the property that you are looking for the equity loan on. Any outstanding balance will reduce the amount that a bank is willing to lend. In many cases, the outstanding balance will reduce the amount by enough that an equity loan on the property is not cost-effective for the bank.

Mind the Numbers

A bank will usually lend up to 80 percent of the value of a home for an equity loan, and sometimes even higher amounts are approved. However, loans on vacant land are typically for a much lower percentage. Banks typically will not lend over 35 percent of the value of the property. If the bank will provide you with a loan, the interest rate will also be higher to compensate for the additional risk. In addition, more points and upfront fees may be required by the lender, driving up the cost of the loan.

Close the Deal

When you have secured an equity loan on your vacant property, you will need to proceed to a loan closing. The lender will want its name entered as the mortgage holder on the property with your local registry of deeds. This ensures that you cannot sell the property to someone else without the lender being paid off first. You may receive the proceeds of the loan as a check, or the lender may issue a line of credit that you may write checks against or request advances. With a line of credit, you typically only pay interest on the outstanding balance of the loan and not on the full amount of the line of credit.