Land Equity Loans Explained
Did you know the land you own can be a powerful form of collateral if you need to acquire a loan? Land equity loans work similarly to home equity loans, but they use your land as collateral. To put it simply, a land equity loan is when you borrow against the equity in land that you own. And, as you most likely know, land equity is the value of your land minus the balance of your land loan.
First South Farm Credit is one of the best options for land loans due to the longer payment schedules and flexible terms that they can offer as a chartered Farm Credit Service lender. However, there are limitations on the purpose of the loans made by FCS lenders. The proceeds from a land equity loan made by a FCS lender such as First South are generally used to acquire more rural land, land improvements, or used to operate or expand an existing farming operation. In contrast, Home Equity loans or land equity loans offered by non-farm credit system lenders may have more flexibility in what the borrower can use the funds for.
“Land equity loans are best for those existing land owners that either want to acquire additional rural land or to cover land improvement expenses. Structuring a land equity loan for these purposes enables the borrower to accomplish what they want to in regards to their land financing and it frees up their cash for other expenses and/or financing needs that are outside of their rural land holdings or farming operation,” John Sport, vice president of First South Farm Credit, said.
One of the benefits of a land equity loan is that it allows you to take out a loan without risking assets such as your home, car, savings or stocks. The fact that you can use an existing asset as collateral for a new loan is often advantageous. And in some situations, the collateral (land) can be used in lieu of a down payment – allowing the borrower to hold onto their cash.
The precise amount of land equity required for a loan varies by lender, and although land is commonly considered a qualified form of collateral, you may find that some lenders are more open than others. Obviously, using land as collateral ties up the asset for the length of the loan and you should know that the lender can take possession of your collateral if you do not meet the terms of the loan agreement.
Find Your Land Equity Loan Lender
First, you must ensure your paperwork is in order and the property deed is in your name. If you are unsure, you can find out through the County Recorder’s office in the county where the property is located. Because land deeds are public record, anyone can obtain this information.
To use land as collateral, the worth of land must be determined.
Once you’ve secured the correct paperwork, your next step is to find the right land equity loan lender, such as First South Farm Credit. As part of the National Farm Credit System, First South is charted to make agricultural and rural land loans in Alabama, Mississippi, and Louisiana. And as a successful cooperative, First South shares its profits with its members/borrowers in the form of a patronage refund, which reduces the cost of borrowing.
“When talking with an applicant about a land equity loan, it’s important to let them know that there may be some limitations due to how the they intend to use the loan funds. As we previously mentioned, if they intend to use the equity in their land to acquire more rural land or for a land improvement loan, then it is very likely that we can help them with this type request. However, if the purpose of the loan is for debt consolidation outside of an existing farming operation or for debt not tied to the purchase or improvement of the rural land, then we may not be able to accommodate the applicant’s loan request. So, it’s best for an applicant to discuss all the details with one of our loan officers to best determine if we can help them or not.” Sport said.
Determining Your Land Value
Typically, using land as collateral for a loan can be accomplished without much hassle. Once the value of your land has been determined by a qualified expert, you can start the process of transforming your property holdings into qualified collateral.
Your land can be a powerful form of collateral for a loan.
To use land as collateral, the worth of the land must be determined and an appraisal will likely be required before a loan can be made. There are a wide variety of factors that can influence the value of your land holdings. Your land’s condition and its current level of development could impact the lending terms that you are offered.
Land Equity Loan Requirements And Terms
Terms of the loan are typically based on four things, 1) credit quality of the applicant, 2) the purpose of the loan, and 3) the income stream of the applicant, and 4) the asset being used as collateral. Using land as collateral often gives the borrower the option of longer payment terms and potentially favorable interest rates, depending on the loan purpose and income stream.
“First South may be able lend up to 85% of the value of the land, but it should be noted that the purpose of the loan and borrower strength could potentially lower the loan to value ratio,” Sport said. “Documentation needed from the applicant will vary depending on each situation. However, existing land deeds, mortgages, and the applicant’s balance sheet and income information/verification are normally part of the transaction. If the loan proceeds will be used for land improvements, we would typically need cost estimates, quotes, and/or invoices,” he added.
Always seek and pursue the best possible terms, which include the best interest rates and preferred length of repayment, that match your needs. And remember, throughout the process, you have the freedom to exit negotiations and seek out alternative options. So, make sure you are comfortable with the loan terms before proceeding.
