Land Equity Loan: What It Is and How to Qualify

This content has been reviewed and edited by an Investment Advisor Representative working for Global Predictions, an SEC-registered Investment Advisor.

If you own land, you might be sitting on a hidden financial opportunity without even realizing it. A land equity loan lets us borrow money using our land as collateral—kind of like how a home equity loan works for homeowners. Whether we’re dreaming of building the perfect home, paying off some debt, or handling a surprise expense, this option can help us tap into our land’s value. So, let’s walk through how it works and how we can qualify, step by step.

Key Takeaways

• A land equity loan lets us use our land as collateral to borrow money.
• The amount we can borrow depends on the value of the land, how much equity we have, and what the lender requires.
• To qualify, we’ll need to show ownership, prove the land’s value, and meet credit and income requirements.

What Is a Land Equity Loan?

A land equity loan is a way for us to turn the value of our land into cash. Just like with a home equity loan, the land itself acts as collateral to secure the loan. The more equity we have in the land, the more borrowing power we’ll get.

Here’s the simple version:

• Equity: This is the value of the land minus any debts we owe on it. For example, if the land is worth $100,000 and we don’t owe anything on it, we have $100,000 in equity.
• Purpose: We can use the loan for just about anything—building a new home, starting a business, paying off debts, or handling emergencies.
• Secured Loan: Because the loan is backed by the land, the interest rates are usually lower than unsecured loans.

How Does a Land Equity Loan Work?

Getting a land equity loan might sound complicated, but it’s pretty simple when we break it down:

1. Appraisal: The lender will order an appraisal to figure out how much the land is worth.
2. Equity Calculation: They subtract any outstanding loans or liens from the land’s total value to calculate equity.
3. Loan Terms: If we qualify, the lender usually lets us borrow up to 50-90% of the land’s value.
4. Repayment: Like a mortgage, we repay the loan in fixed monthly installments over time.

Hypothetical Scenario

Let’s say we own a piece of land worth $150,000, and it’s completely paid off. A lender offers us a loan for 70% of the land’s value—so we could borrow up to $105,000. We decide to use the funds to build a dream cabin and repay the loan over 10 years with a fixed interest rate. Simple, right?

How to Qualify for a Land Equity Loan

Qualifying for a land equity loan isn’t all that different from getting approved for a mortgage. Here’s what lenders will be looking for:

1. Proof of Ownership

We’ll need to provide documents that prove we own the land—like a title or deed.

2. Land Value

The lender will order an appraisal to determine the land’s market value. Things like location, size, zoning rules, and whether utilities are in place will play a role.

3. Equity in the Land

The more equity we have, the better our chances of qualifying for the loan. Fully owning the land gives us an advantage here.

4. Credit Score

Our credit score matters. A good score shows lenders we’re reliable and can help us get better loan terms and lower interest rates.

5. Income and Debt-to-Income Ratio

Lenders will want to make sure we can afford the loan payments. We’ll need to show proof of income and have a manageable debt-to-income ratio.

6. Purpose of the Loan

Some lenders may ask how we plan to use the loan funds. Whether it’s for construction, debt consolidation, or something else, having a clear plan can strengthen our application.

Pros and Cons of a Land Equity Loan

Like any financial tool, a land equity loan has its ups and downs. Here’s what we need to know:

Pros:

• Lower Interest Rates: Since the loan is secured by the land, we can typically get a lower rate than with unsecured loans.
• Access to Significant Funds: Depending on the land’s value, we can borrow a pretty substantial amount.
• Flexible Use: We can use the funds however we need—building a home, paying down debt, or funding a business.

Cons:

• Risk of Losing the Land: If we can’t make the payments, the lender could take ownership of the land.
• Stricter Requirements: Qualifying might be harder if the land is undeveloped or doesn’t have utilities in place.
• Appraisal Costs: We’ll need to pay for a professional appraisal to confirm the land’s value.

Alternatives to a Land Equity Loan

If a land equity loan doesn’t feel like the right fit, there are a few other options worth considering:

• Home Equity Loan: If we own a home, we could borrow against its equity instead.
• Personal Loan: A faster option with no collateral, though it might come with higher interest rates.
• Construction Loan: Designed specifically to fund building projects.
• Cash-Out Refinance: If we already have a mortgage, refinancing could help us access extra funds.

FAQs

Can I get a land equity loan if my land is undeveloped?

Yes, but it might be harder to qualify. Lenders often prefer land with utilities or other improvements.

How much can I borrow with a land equity loan?

Most lenders will let us borrow up to 50-90% of the land’s value, depending on our equity and credit score.

Is a land equity loan the same as a home equity loan?

Not quite. A home equity loan uses a house as collateral, while a land equity loan uses the value of the land.