What Is a Land Equity Loan and How to Get One
Similar to home equity, land equity is the value of your land minus any money you owe on the loan used to purchase it. With a land equity loan, you can turn that equity into cash without having to sell the land itself. You can use the money to build a home on the property, pay down high-interest debt or cover unexpected medical bills.
What defines a land equity loan?
Land equity loans are similar to home equity loans, except your land is used as collateral instead of your house.
The land may be raw without any improvements, or it may have some infrastructure in place, like electric and water lines. A person taking out a land equity loan may own the land outright or have a land loan, which is like a mortgage for a piece of land.
Land equity loans are often used to purchase neighboring land or additional acreage, develop the property or lower the required down payment on a construction project.
Land equity is sometimes called “lot equity.” However, “land equity” can encompass untouched (unimproved) land, whereas “lot” is sometimes used to describe a piece of land that has been improved and is ready to be built upon. It’s important to make sure you’re on the same page as your lender and contractors.
How does a land equity loan work?
With a land equity loan, you’re cashing out some of your equity by putting up your land as collateral. If you default on the loan, you could lose the land to foreclosure.
If you still have an outstanding balance on the loan you used to buy the land, the land equity loan will be a second mortgage. That means that if the land goes into foreclosure, your original loan would be paid off first, and the land equity loan will be repaid with whatever’s left over from the sale of the property.
When it comes to qualification:
- Credit and loan-to-value (LTV) ratio requirements are typically more stringent than they are for home equity loans
- Repayment terms are usually shorter
- Interest rates are usually higher
Types of land equity loans
There are several different types of land equity loans, and each works slightly differently. However, what unites them is that they use your equity in a piece of land as collateral for the loan.
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Lump sum land equity loan. Like a home equity loan, you’ll receive funds in a lump sum and repay the loan with payments that don’t change.
Example: You have 50% equity in land worth $150,000. You qualify to receive a lump sum of $52,000.
Best if: You need a lump sum secured by land you already own. -
Land equity line of credit. Like a home equity line of credit (HELOC), this type of loan allows you to access credit on an as-needed basis and only pay interest on what you borrow.
Example: You have 50% equity in land worth $150,000. You qualify for a credit line with a $65,250 limit, which you can use and reuse as many times as you’d like during the draw period.
Best if: You want flexible access to funds over time for phased or uncertain expenses -
Land equity cash-out refinance. You’ll take out a new loan that’s larger than your current loan balance. You’ll pay off the original loan, then pocket the difference. You could potentially lower your payments, lock in a lower interest rate and use the extra cash to improve your land or pay off other debts.
Example: You owe $50,000 on land worth $150,000. You refinance into a $100,000 loan and walk away with $50,000 cash.
Best if: You already have a land loan and want to refinance for better terms while pulling out equity -
Land equity construction loan. If you’re planning to build a house on the land, some lenders will accept your equity as part or all of a down payment on a construction or manufactured home loan.
Example: You own your land outright, and it’s currently worth $150,000. You use $20,000 as a down payment on a $200,000 construction loan, and make interest-only payments while the work is done. Once construction is complete, you get a permanent mortgage.
Best if: You want to fund a construction project without putting down a ton of cash.
You may be able to get a land equity loan from a large national mortgage lender, but in most cases land loan lenders are regional banks, Farm Credit institutions and local credit unions.
If you’re searching for land equity lenders in your area, credit unions and niche lenders who specialize in agricultural lending are a great place to start, since they’re set up to deal with land-based transactions and are more familiar with the land values in a local area.
A few search terms to try:
- land equity loan [insert your state]
- land loan lender [insert your state]
- vacant land loan [insert your state]
- credit union land loan [insert your state]
- community bank land loans [insert your state]
How much money can I borrow with a land equity loan?
It’s common for lenders to limit borrowers to 50% to 85% of the land’s value.
Here’s how to calculate your potential land equity loan amount:
- Multiply your land’s value by 85% (0.85)
- Subtract the amount you have left to pay on your mortgage
- The result is your potential land equity loan amount
That’s likely the most you can access with a land equity loan. If you already have a specific lender in mind, check their maximum LTV — if it’s lower than 85% you can re-do the calculation by subbing in their LTV limit.
Pros and cons of a land equity loan
Pros
- Flexible funds. You can use the funds for a wide variety of purposes (but check whether your lender sets any limitations on this).
- Interest options. You can choose a fixed- or adjustable-rate loan.
- Longer loan term options. You can find a longer repayment period than a personal loan offers.
- Competitive rates. You may be able to access lower interest rates than you could get with unsecured loans.
Cons
- Must be secured. You have to put land up as collateral, which means you could lose the land if you default.
- Requires equity. Your lender may require you to have a significant amount of equity.
- Funds may be limited. You’ll have less buying power if the land doesn’t have essential infrastructure like water, electricity, or roads.
- Higher rates. You’ll have to pay more in interest than you would for a loan secured by a home.
Land equity loan requirements
Available equity
The exact amount of equity you need varies by lender and the type of land equity loan. The maximum LTV ratio is typically between 50% to 85%, depending on the type of land and the intended use of the funds. That means you’d need to maintain between 15% and 50% equity.
DTI ratio
Lenders use your debt-to-income (DTI) ratio to evaluate what you can afford to borrow. Each lender will set its own limits, but you can expect that most will cap your DTI ratio at 40% or less.
Credit score
Lenders can also set their own credit score minimums, but if you’ve got a credit score under 680, you may struggle to find funding.
Repayment terms
Land equity loans tend to have shorter loan terms, but they vary significantly by lender. Typically, loan terms are about 10 to 12 years.
Loan amounts
Some lenders may have a maximum loan amount, like $50,000. Others may not have a maximum loan amount as long as you remain within their maximum LTV ratio. In some cases, your maximum loan amount could also be limited by the land type. Some lenders aren’t willing to lend as much for vacant land, like a parcel in the woods with nothing on it, as they are for land that has been developed (that is, has utilities or other infrastructure added).
Land equity loans vs. home equity loan requirements
| Land equity loans | Home equity loans | |
|---|---|---|
| Collateral type | Land only | Home and land |
| Typical loan terms |
| Up to 30 years |
| Equity needed | 50% to 80% LTV maximum | Up to 100% LTV |
| Best if… | You need a lump sum secured by land you already own. | You already own a home and want a lump-sum loan with predictable payments. |
How to get a land equity loan
- Calculate your equity. Before applying for a land equity loan, you need to know how much equity you have in your land. You can use LendingTree’s home equity loan calculator as a quick check of how much you could qualify for (at an 85% LTV ratio). Equity is the difference between the land’s current value and any debts or liens against it.
- Check your credit: Lenders will consider your credit score when determining loan eligibility and interest rates, so it’s a good idea to check your credit score — and improve it if necessary — before applying.
- Research lenders. Land equity loans are much less common than home equity loans, and often come from local or regional lenders. Compare the terms, interest rates, fees and eligibility requirements of each lender. Pay close attention to the maximum LTV ratios allowed, since that will determine how much you can borrow.
- Gather documentation. You’ll likely need proof that you own the land and documentation of your income and assets.
- Get quotes from three to five lenders. Do this on the same day if possible — this will also help you make “apples to apples” comparisons when you receive your loan estimates. LendingTree’s platform is a great way to get quotes from lenders who must compete for your business.
- Get a land appraisal. Most lenders require a professional appraisal of the land to determine its current market value. Land equity lenders base how much they’re willing to loan you on your equity amount, which in turn is determined by the land’s value.
- Close on the loan. If your loan is approved, you’ll be assigned a closing date. Typically, you’ll sign loan documents and pay your closing costs on your way to sealing the deal.
- Receive your funds. After the loan closes, the funds from the loan are disbursed in a lump sum. Or, if you opened a line of credit, you can begin using it.
Closing costs on a land equity loan can vary based on the loan amount, lender, the location of the land and other variables. Generally, closing costs for any type of equity loan range from 2% to 6% of the loan amount. However, because land loans are commonly viewed as higher risk than traditional home mortgages, the percentage might be on the higher end or include additional fees.
Is using land as collateral for a loan a good idea?
Overall, a land equity loan is likely best for those who:
- Have significant equity in their land
- Are certain they can afford the payments
- Have no plans to build on the land any time soon
If you have no plans to build on the land
- It could make sense to tap your land equity for a goal that improves your financial position, like paying down high-interest debt — but only as long as you’re confident you can keep up with the additional loan payment.
- However, if you don’t have a rock-solid plan for paying off the new loan and you’re replacing short-term debt (like credit card debt) with long-term debt, you may actually be digging yourself into a deeper financial hole. Using equity to pay off high-interest debt (like credit card debt) could just extend the agony and put your land at risk in the process.
If you’re planning to build or place a home on the land
If you have real, near-term plans to build on the land, it’s probably best not to take out a land equity loan. Here’s why:
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You could limit your ability to get a construction loan later. First, it could reduce your ability to qualify for a construction loan. Many construction lenders expect you to use your land equity as part of your down payment. If you borrow against that equity ahead of time, you’re effectively reducing the amount of equity available to put toward the build.
Second, once construction is complete, most construction loans convert into a traditional mortgage. But if you’ve already tapped your land equity, you may need to bring additional cash to closing to meet the lender’s required down payment. - You could unnecessarily put both the land and a home at risk. If you plan to place a manufactured home on the land and use your land equity in lieu of a down payment, think carefully before moving forward — you could lose both your land and home in the event of loan default. Compare using a land equity loan to any available chattel loan options, which would allow you to finance only the home.
Frequently asked questions
Yes, you can use land equity as a down payment on a construction loan to build a new home — but you’ll typically have to own the land outright (that is, have no outstanding mortgages or liens).
Be aware, however, that your land equity may not cover the entire down payment, especially since construction loans require large down payments (usually 20% to 30%).
Yes, you can use land equity instead of cash to make the down payment on a manufactured home loan. This is sometimes called “land in lieu” financing. Keep in mind, however, that if the loan goes into default, you’ll lose both the home and land because you’ve now tied both to the debt.
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.
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