Understanding Land Equity Loans
Using the equity you have in your property as collateral for a new loan is a common tool with landowners who want to acquire more land. It’s important to understand how they function. A land equity loan is borrowing against the portion of the land that isn’t leveraged. In simpler terms, the value of the land minus the balance of your existing loan.
First South Farm Credit, as a part of the Farm Credit System, is a great option for these because we can offer longer terms and structure the loan to fit the situation. There are limitations to these types of loans, however. They’re typically used to acquire more land, expand an existing farming operation or to make land improvements.
“When talking with an applicant about a land equity loan, it’s important to let them know that there may be some limitations due to how they intend to use the loan funds. As we previously mentioned, if they intend to use the equity in their land to acquire more rural land or for a land improvement loan, then it is very likely that we can help them with this type of request. However, if the purpose of the loan is for debt consolidation outside of an existing farming operation or for debt not tied to the purchase or improvement of the rural land, then we may not be able to accommodate the applicant’s loan request. So, it’s best for an applicant to discuss all the details with one of our loan officers to best determine if we can help them or not,” John Sport, Vice President.
There are plenty of benefits to a land equity loan, primarily that you do not have to risk other assets like your home or stock investments to get the loan. And you can use your equity as collateral for a down payment, which allows you to keep cash on hand. However, you need to understand that by using your equity as collateral, it ties up that asset for the length of the loan.
“Land equity loans are best for those existing landowners that either want to acquire additional rural land or to cover land improvement expenses. Structuring a land equity loan for these purposes enables the borrower to accomplish what they want to regarding their land financing, and it frees up their cash for other expenses and/or financing needs that are outside of their rural land holdings or farming operation,” said Sport.
Terms of the loan are typically based on four things, 1) credit quality of the applicant, 2) the purpose of the loan, and 3) the income stream of the applicant, and 4) the asset being used as collateral. Using land as collateral often gives the borrower the option of longer payment terms and potentially favorable interest rates, depending on the loan purpose and income stream.
“First South may be able to lend up to 85% of the value of the land, but it should be noted that the purpose of the loan and borrower strength could potentially lower the loan-to-value ratio,” Sport said. “Documentation needed from the applicant will vary depending on each situation. However, existing land deeds, mortgages, and the applicant’s balance sheet and income information/verification are normally part of the transaction. If the loan proceeds will be used for land improvements, we would typically need cost estimates, quotes, and/or invoices,” he added.