Purchasing land requires a considerable amount of investment, depending on the area and the land type you are willing to invest in. Luckily, home equity lands are available to finance the acquisition you plan to proceed with.
Land equity will be the land value minus any money you owe on the land used for purchasing it. Using a land equity loan, you can turn the equity into cash without selling the land.
So you can utilize it for agricultural purposes, building vineyards, or any other property type you want.
However, it is essential to research the lenders who can provide you with financing on time and guarantee a lower interest rate than the others. The research process here will ensure you find the best land equity loan suitable for your requirements.
Understanding the land equity loans
Land equity loans are similar to home equity loans. However, your land will be used as collateral for financing. The land can be raw without any improvements or might have some infrastructure like water lines or electricity.
The person willing to take a land equity loan may own the land outright or have a land loan, a mortgage for a piece of land.
A vital thing to note here is that land equity is sometimes referred to as lot equity, but a lot may also be used for a piece of land that has been improved and is ready to start construction.
So, ensure you are on the same page as the contractors and lenders before deciding.
How does a land equity loan work?
When you choose to get land equity loans, you will be cashing out some of the equity by putting up your land as collateral. If you default on the loan, you can lose the ground to foreclosure.
Land loans are risky for the lenders, especially if you are still paying off the land. So, the requirements here are more stringent than any other type of equity loan.
The lenders typically wish to see a lower loan-to-value ratio and want assurance of shorter repayment terms. However, given the risk the lenders will take, they tend to charge higher interest rates for land equity loans.
If you still have an outstanding balance on the loan used for purchasing the land, then the equity loan can be a second mortgage here.
This would mean that if the land goes into foreclosure, your original loan would be paid off first, and then the Land equity loan will be repaid with whatever amount from the sale of the property.
Types of land equity loans
If planning land equity loans, you must know the different available types. Remember, each works differently, so research and understanding here is crucial.
• Land equity line of credit
Like HELOC, this type of loan offers you access to credit as needed. This means you only have to pay the interest on the borrowed amount but not the total amount assigned to you.
• Land equity cash-out refinance
Here, you must take out a new loan, which will be larger than your current loan balance.
First, you must pay off the original loan and then the difference amount. Remember, you can reduce your payments here and lock in a lower interest rate. Also, you can use the extra cash to improve your land and clear off your debts.
• Land equity construction loan
If you are planning to build a house on the land, remember some lenders will accept your equity as a part of the down payment on manufactured or construction home loans.
However, there is something you need to keep in mind. You will find it harder to use your land equity as collateral for a loan if you still owe money on a land loan.
So, if you are still looking for a land equity loan lender who will serve you right, consider looking for credit unions or local banks in the area. It will make it easy for you to acquire the financing you need.
Land equity loan requirements
Getting a land equity loan can be beneficial when you are struggling or wish to invest. However, if you stay aware of the requirements, you can stay prepared in advance and make the needed decisions on time.
• Available equity
The amount of equity you need will vary by lender. Herein, the maximum LTV will typically come between 65 and 85%, depending on the intended use of the funds and the type of land you wish to purchase. This means you must maintain about 15 to 35% of equity.
• DTI ratio
The lenders will use your DTI ratio to evaluate your ability to borrow. Each of the lenders will have its limits, but you can expect the most to cap your DTI ratio at 40% or less.
• Credit score
The lenders also have pre-determined credit score requirements for providing the financing. If you have a credit under 620, you will need help to get the required funding.
• Repayment terms
Keep in mind that land equity loans have shorter loan terms. However, they will vary significantly from one lender to another.
Typically, the loan term will be between 10 and 12 years. So, keep researching to find a private money lender to provide you with the best deal possible.
• Loan amounts
Also, it is vital to remember that some lenders have a maximum loan amount of $50,000. The others may not have any maximum loan amount as long as you are below the maximum LTV ratio or in the same range.
Still, you need to research the lenders and know that the lender will typically offer less for vacant land, such as land with nothing on it, than land that has been significantly developed or has some infrastructure.
Is it reasonable to use land as collateral for a loan?
If you see it on an overall basis, then a land equity loan will be the best option for those who
- Have a significant amount of equity in their land
- Are confident they can afford to pay the payments on time
- Have no plans to build on the land shortly
If you do not plan to build on the land
It leverages your property to improve your financial position, like paying down high-interest debt. However, it will only be suitable if you are confident you can keep up with the additional loan payment.
If you do not have a solid rock plan for paying off the new loan and are replacing the short-term debt with another long-term debt, you can dig into a deeper financial hole. Using equity to clear higher interest could extend the agony and put you and your land at risk.
If you plan to build on the land
If you have near-term plans for building on the land, taking out a land equity loan will probably be best. Here are the reasons why.
You can limit your ability to get a construction loan later if you choose to finance the down payment for a construction loan using equity. Once the construction is over, your property will be eligible for a traditional mortgage.
However, this isn’t possible if you tie up your equity in the case of a land equity loan. In such cases, you may have to come up with a cash down payment for the construction if required. A land equity loan will also count against your DTI ratio, which is crucial in qualifying for a construction loan.
You will unnecessarily put your land and home at risk if you plan to place a manufactured home on the ground or use your land equity for a down payment. In such cases, you must also think carefully about the other options.
Make sure you compare your land equity loan to other loan options, allowing you to finance the property; otherwise, you could lose your property in case of a loan default.
Conclusion
Finding the best land equity loans, no doubt, can be tricky. If you are facing challenges, consider getting support from Private Capital Investors. Their team of experts understands the requirements of each client.
They will develop a proper strategy to help you contact the best lenders and acquire the financing you need for your project.
No matter the size or scale of your financing needs, the experts will guide you in the right direction and ensure you get the financing at the lowest interest rates possible.
