Using the equity you have in your property as collateral for a new loan is a common tool with landowners who want to acquire more land. It’s important to understand how they function. A land equity loan is borrowing against the portion of the land that isn’t leveraged. In simpler terms, the value of the land minus the balance of your existing loan.
First South Farm Credit, as a part of the Farm Credit System, is a great option for these because we can offer longer terms and structure the loan to fit the situation. There are limitations to these types of loans, however. They’re typically used to acquire more land, expand an existing farming operation or to make land improvements.
“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 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 of 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,” John Sport, Vice President.
There are plenty of benefits to a land equity loan, primarily that you do not have to risk other assets like your home or stock investments to get the loan. And you can use your equity as collateral for a down payment, which allows you to keep cash on hand. However, you need to understand that by using your equity as collateral, it ties up that asset for the length of the loan.
“Land equity loans are best for those existing landowners 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 regarding 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,” said Sport.
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 to 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.
If you would like more information on land equity loans or any other type of land loan, please contact your local First South Farm Credit branch.
FAQs
Many standard eligibility requirements include a credit score of 680 — though you want a score of 760 or higher to get the best rates — and a low debt-to-income ratio (DTI).
How to calculate land equity? ›
Equity is typically expressed as a percentage of the value of the land, not measured per acre. To calculate how much equity you have, subtract the amount you owe on any loans secured by the land from the appraised value of the land.
Why are land loans hard to get? ›
However, qualifying for a land loan can be more difficult than getting a regular mortgage because it is riskier for lenders. As a result, borrowers may have to prove that they have a good credit score (700 or above), and will have to explain what they intend to use the land for.
How to calculate equity loans? ›
You can figure out how much equity you have in your home by subtracting the amount you owe on all loans secured by your house from its appraised value.
What disqualifies you for a HELOC? ›
You may be disqualified from opening a HELOC if you do not meet the lender requirements. This may include low equity in your home, inadequate income or a low credit score.
What is the lowest credit score for land? ›
Credit score minimum: 700The FDIC doesn't have a hard minimum when it comes to the credit score needed to qualify for a land loan. However, it's common for lenders to require at least a 700 score.
What is the longest land loan you can get? ›
What is the longest loan you can get for land? Land loan repayment terms can vary by lender, how much you're borrowing and other factors. In general, though, you can get a loan with a repayment term of up to 20 years.
Is land a good collateral for a loan? ›
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.
What is the difference between improved lot and unimproved lot? ›
Unimproved land, also known as raw land, refers to a piece of real estate that has not undergone any significant enhancements or developments. Improved land, on the other hand, has been modified or developed to make it more suitable for various purposes such as residential, commercial, or industrial use.
What is the monthly payment on a $50,000 HELOC? ›
Assuming a borrower who has spent up to their HELOC credit limit, the monthly payment on a $50,000 HELOC at today's rates would be about $403 for an interest-only payment, or $472 for a principle-and-interest payment.
A home equity loan generally allows you to borrow around 80% to 85% of your home's value, minus what you owe on your mortgage. Some lenders allow you to borrow significantly more — even as much as 100% in some instances.
What is the monthly payment on a $75,000 home equity loan? ›
Example 2: 15-year fixed home equity loan at 9.07%
As of March 29, 2024, the average national rate for a 15-year loan was nearly the same as for a 10-year loan: 8.70%. With that rate and term, you'd pay $747.37 per month for the loan.
What credit score do I need to borrow from my home equity? ›
In many cases, lenders will set a minimum 620 credit score to qualify you for a home equity loan — though the limit can be as high as 660 or 680 in some cases.
Is it smart to use home equity to buy land? ›
Both home equity loans and HELOCs come with low average rates right now compared to many other sources of funding. In turn, both can be a smart option to consider if you want to buy land but don't have the cash on hand to do it.
Can I get a HELOC with a 650 credit score? ›
Getting a HELOC with a 650 credit score, while not ideal, does not typically exclude you from getting a loan. A home equity line of credit (HELOC) allows qualified homeowners to borrow up to 80 percent of their home's market value, and they may have up to 20 years to repay it.
How much equity do you need to qualify for a home equity loan? ›
To qualify for a home equity loan or line of credit, you'll typically need at least 20 percent equity in your home. Some lenders allow for 15 percent. You'll also need a solid credit score and acceptable debt-to-income (DTI) ratio.
