How to Navigate Land Equity Loans
Did you know that the land you own can be a potent form of collateral when seeking a loan? Land equity loans operate similarly to home equity loans, utilizing your land as collateral. Simply put, a land equity loan allows you to borrow against the equity in the land you own, where land equity is the value of your land minus the balance of your land loan.
First South Farm Credit emerges as a standout choice for land loans, thanks to its chartered Farm Credit Service status, offering extended payment schedules and flexible terms. However, it’s crucial to recognize that loans from Farm Credit System (FCS) lenders, like First South, are primarily intended for acquiring rural land, making land improvements, or expanding existing farming operations. In contrast, non-FCS lenders may provide more flexibility in fund utilization for Home Equity loans or land equity loans.
John Sport, Vice President of First South Farm Credit, emphasizes that land equity loans are ideal for existing landowners looking to acquire additional rural land or cover land improvement expenses. Structuring the loan for these specific purposes enables borrowers to meet their land financing goals while freeing up cash for other expenses beyond their rural land holdings or farming operations.
One significant advantage of land equity loans is the ability to secure a loan without risking assets such as your home, car, savings, or stocks. Using an existing asset as collateral for a new loan is advantageous, and in certain situations, the land can substitute for a down payment, allowing the borrower to retain their cash.
The amount of land equity required for a loan varies by lender, and while land is generally considered a qualified form of collateral, some lenders may be more open than others. However, it’s essential to understand that using land as collateral ties up the asset for the loan’s duration, and the lender can take possession of your collateral if you fail to meet the loan terms.
To initiate the process, ensure your paperwork is in order, and the property deed is in your name. Verification can be obtained through the County Recorder’s office in the county where the property is located, as land deeds are public records.
Determining the worth of the land is crucial when using it as collateral, and an appraisal may be required before a loan can be approved. Factors such as the land’s condition and current level of development can influence lending terms. The terms of the loan typically depend on the credit quality of the applicant, the loan’s purpose, the applicant’s income stream, and the asset being used as collateral.
First South Farm Credit may lend up to 85% of the land’s value, with the loan-to-value ratio potentially influenced by the loan purpose and borrower strength. Documentation requirements vary, but they often include existing land deeds, mortgages, the applicant’s balance sheet, income information, and verification. For land improvement loans, cost estimates, quotes, and invoices may also be necessary.
Always seek the best possible terms, including favorable interest rates and a preferred repayment length that aligns with your needs. Throughout the process, remember that you have the freedom to explore alternative options and should only proceed if you are comfortable with the loan terms. Land equity loans open up avenues for utilizing your existing assets strategically, offering financial flexibility and potential benefits for landowners.