Owning a piece of land without a developed structure on it can be a smart financial move. You can build your dream home on it or keep it in the family to pass down from one generation to the next as part of your legacy.
While owning bare land can be a joyful experience, it is, at its core, an unused asset.
Even so, most vacant landowners still have to pay real estate taxes and experience difficulty borrowing against the equity built up in the property over time, especially when there is no intention to build on the land in the immediate term.
Land presents a challenge when used as collateral for equity financing because most lenders view raw land as an incredible risk. When landowners don’t live on the property, it’s far easier to walk away and fail to repay an equity loan on the land. It’s also harder to sell land, especially for rural properties. This leaves lenders exposed to a level of risk not found with home equity financing deals.
However, some lenders will work with you if you’re considering taking out a land equity loan or line of credit to buy another piece of land, make home improvements, buy a mobile, manufactured, or modular home, make a farming investment, consolidate debt, or pay for something else.
Here’s what you need to know about obtaining vacant land equity financing first.
It is best to own the vacant land outright
You may be able to find a traditional bank or credit union that services your local area willing to offer equity loans or lines of credit for vacant land, and there are a handful of online lenders and brokers who specialize in this type of financing.
Regardless of the route you choose, most lenders are apt to offer land equity financing to individuals who own their large piece of land or small lot outright. With no other debt tied to the land, lenders see the property as a lower risk than if there is an outstanding mortgage or lien against it.
If you already have a mortgage on the land you plan to use as collateral for an equity loan or line of credit, you may not have as much access to the equity in your land due to the lack of equity and inherent risk of land ownership.
How much funding is vacant land eligible for
For traditional home equity loans or a home equity line of credit (HELOC), lenders typically offer to finance properties at a relatively high loan-to-value (LTV) ratio—the amount remaining on the first mortgage, or first and second mortgage, compared to the market value of the home. However, because there is no permanent structure developed on vacant land, lenders are less likely to lend up to 90% or 100% of the land’s value when it comes to land equity lending.
Instead, most land lenders cap equity loans for vacant land at 65-85% of the property’s value. In some cases, you may be able to acquire a land equity loan for a higher portion of equity, but you will likely face higher interest rates and additional closing costs as a result.
Lenders use these tactics to reduce their overall risk when providing land equity loans and lines of credit.
Alternative lending options for vacant landowners
1. Refinance your vacant land loan
Because obtaining a land equity loan can prove to be difficult, especially for those who don’t own the land outright, you may be better off refinancing your current land loan and taking cash out. You can get a cash-out refinance loan on the land even if you don’t currently have a loan on the property.
We recommend reaching out to your current land mortgage lender, preferred bank, or credit union to explore all your options with them. If they don’t offer the financial product you’re looking to obtain, they might be able to point you in the right direction.
A quick internet search also provides a handful of national land refinance lenders that may be able to provide refinancing, depending on your situation and needs. Most of them specialize in refinancing land loans when the land is used for farming and agriculture, though.
2. Obtain a personal loan
One of the quickest ways to compare rates tailored to you is to get matched with lenders that meet your credit score and loan amount requirements. You can compare matches of up to $75,000 from multiple lenders online. Our platform can help people with excellent, good, fair, poor, or even bad credit scores.
If your credit score is on the low end, you can apply through a company like Upstart, which uses more than just your credit score for approval of personal loans from $1,000 to $75,000. The Upstart platform can assist people with all types of credit scores. Checking your rate with Upstart will not affect your credit score.
Another platform is Upgrade. It offers personal loans from $1,000 to $50,000 that can be used for home improvement, debt consolidation, a major purchase, or other purposes.
Final thoughts on land equity loans for vacant land
Owning land is a smart way to invest in your future, but tapping into equity accumulated in undeveloped or vacant land can present a few challenges.
You can start by understanding your borrowing options with various lenders. Just know that you may be required to own your land outright before an equity loan or line of credit is offered to you.
It’s also important to understand that land equity loans are rarely extended to borrowers for more than 85% of the available equity. Take the time to plan accordingly and consider a cash-out refinance or a personal loan as an alternative.