Loans, especially large loans, can be difficult to obtain, even for those who are financially secure. Fortunately, if you need to secure a loan, there are a number of options available — including local land loan lenders near you who are familiar with financing rural property in your area. Just like a home equity loan, you can use your land as collateral, but instead of borrowing against the equity in your home, you’re borrowing against the equity in your land.
Land Collateral Loans Explained
Land collateral loans are secured loans because your property guarantees the loan. The lender can seize the property to pay off the remainder of the loan if you don’t pay your collateral loan. However, lenders often feel more confident in approving collateral loans and in turn, these secured loans may have slightly lower interest rates than unsecured loans. Furthermore, a loan secured with collateral may enable a borrower to borrow a greater amount compared to an unsecured loan, which relies solely on the borrower’s income and credit history.
“One of the benefits of using land as collateral for a 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,” John Sport, vice president of First South Farm Credit, said.
First South Farm Credit is a financial cooperative that provides a steady flow of credit to eligible borrowers in Alabama, Louisiana, and Mississippi. It 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. Many landowners begin the process by searching for land loan lenders near me because local lenders typically understand regional land values, timber markets, and rural property infrastructure better than large national banks.
The Basics Of Using Land As Collateral For A Loan
To secure a collateral loan using your land, the lender must first approve you, and it must be determined that the land has an equity value that is equal to or exceeds that of the requested loan amount. After the lender approves the land as collateral, a lien will be put on the land. Once the loan is paid in full, the lien will be released.
How Much Is My Land Worth?
The first step in using land as collateral for a loan is determining the value of your land. For an in-depth look at and help with determining the value of your land, take a look at our article How Much Is My Land Worth? Once the land value has been determined, you can start the process of transforming your property holdings into qualified collateral. If you’ve been searching for land loans near me, keep in mind that most lenders will still require a land appraisal to determine equity value, no matter the location.
“The value of the land is best determined by a rural land real estate appraiser. When assessing the land, a number of factors will be considered by the appraiser, such as the location, condition, timber quality, infrastructure and more. Then it has to be determined if the land is free of any debt restrictions and available to be pledged as collateral for a loan. Once these initial concerns are addressed, then the borrower and lender can discuss the structure of the loan that works for both parties,” Sport said.
What Can You Use A Land Equity Loan For?
Land owners that either want to acquire additional rural land or to cover land improvement expenses, such as building ponds, barns, etc., often use the equity in their land as collateral for a land improvement loan. Structuring a land equity loan 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.
Can You Use Land As Collateral For A Construction Loan?
“Those who are ready to improve or construct a home on their rural homes sites can use land as collateral for an improvement/construction loan and…. the equity in the land can reduce or possibly eliminate the down payment for an improvement/construction loan,” Brandon Simpson, loan officer for First South Farm Credit, said.
Construction loans can be used to pay for materials, labor and land, and generally require you to only pay interest on the funds that are used as the construction progresses. To obtain a construction loan, your lender will need your building plans and your financial records, as well as an estimated budget and timeline.
Can You Use Land As Collateral For A Personal Loan?
Using land as collateral for a personal loan will vary depending on the lender you use. 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 a Farm Credit lender may not be able to accommodate the applicant’s loan request. So, it’s best for an applicant to discuss all the details with a loan officer to best determine if a loan can be provided or not.
“The use of the funds controls the loan purpose. Farm Credit is tied to rural agricultural lending for full and part-time farmers as well as rural land owners. One of the more common reason for a personal loan is for debt consolidation, and if that debt consolidation is not tied to a farming operation or rural land, chances are we cannot make that loan.” Simpson said.
Can You Use Land As Collateral For Buying More Land?
The most common reason people use land as collateral for a loan is to buy more land.
“If you don’t want to use cash for a down payment, you can pledge the land you own to reduce or eliminate your down payment. As for when you should or should not do this, it’s based on everyone’s financial situation and goal they are trying to accomplish,” Simpson said.
The borrower should be mindful that 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.
The Advantages And Disadvantages Land Collateral Loans
In general, the advantage of land collateral loans is that the value of land often enables the lender and borrower to structure a deal that is favorable for both parties. Land can provide sufficient collateral to help with a down payment, thereby freeing up cash for the borrower.
Using land as collateral for a loan allows you to take out a loan without risking assets such as your home, car, savings or stocks.
“In some situations, the collateral (land) can be used in lieu of a down payment – allowing the borrower to hold onto their cash,” Sport said.
The disadvantage is that using land as collateral ties up the asset for the length of the loan and the lender can take possession of your collateral if you do not meet the terms of the loan agreement.
For many borrowers, the key is finding a lender who understands rural land. Searching for land loans near me can connect you with financing partners who work specifically with recreational, timber, and agricultural properties.
Questions To Ask Lenders That Accept Land As Collateral
Lenders That Accept Land As Collateral, fully understanding the requirements and expectations of using your property as collateral for a land loan is essential before continuing the process and Sport says there are few general questions you should ask your loan officer.
- Can I use my land as collateral for a “specific type” of loan (and know that the purpose of the loan will dictate the lender’s response)?
- What is involved with using my land as collateral for a loan?
- Do I need an appraisal?
- Are there fees involved?
- How does using land as collateral impact my payments and loan terms?
Are Equity Land Loans Right For You?
“Deciding whether or not a land equity loan is right for you is definitely a personal decision, but generally speaking, if using land as collateral on a loan can reduce your payments and provide other favorable loan terms, then it is a good option to consider. However, the borrower needs to fully understand the risk and implications of using their existing land as equity for an additional loan,” Sport said.
