How to Use Land as Collateral for a Secured Loan
Some banks and credit unions write loans secured by land that are known as lot loans. In the event of borrower default, the lender assumes control of the land. Lot loans are broken up into two categories: developed lot loans and raw land loans. Developed lots are usually defined as having road and utility access whereas raw land has neither of these attributes. Underwriting requirements and loan terms vary greatly between financial institutions.
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Instructions
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Find your deed for the land that you intend to use as collateral for your loan. Locate your land survey. If you do not have a land survey, you must hire a state certified surveyor to conduct one. Surveys normally cost between $500 and $1,500 depending on the size of the plot. It normally takes a surveyor a few days to complete the survey after visiting the plot of land.
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Contact local banks and credit unions. Ask lenders at local financial institutions if they offer financing for lot loans. Tell the lenders whether you have raw or developed land. You should let them know how much you need to borrow and the size of the plot. Most financial institutions have minimum and maximum dollar limits for loans so you need to find out if your loan meets each institution's underwriting guidelines. Additionally, some banks limit lot loans to parcels of 10 acres or less whereas others lend on plots as big as 40 acres. Most lending limits are specific to states or counties so you should speak to local lenders to find out the options that are available to you.
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Decide which lender has the best terms and arrange a meeting with the loan officer. Provide the officer with your survey, deed and insurance information. You must also provide your two most recent pay stubs. If you run your own business, give the loan officer your last two years personal and business tax returns. You may have to provide a personal-financial-statement listing your assets and liabilities if you are self-employed. The loan officer must check your credit and forward your information to the underwriting department. The initial loan approval normally takes less than 48 hours after which the loan officer arranges the land appraisal.
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Meet with your lender after the land appraisal to discuss the outcome. It normally takes a few weeks for the lender to organize the appraisal and receive the report. If your land has sufficient value to support the loan, you can arrange a loan closing. If your land lacks value, you must lower the amount of your loan request. Having agreed a loan amount, you can sign the documents to close the loan.
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Tips & Warnings
Credit unions are member-owned and operated and consequently tend to have more flexible terms for loans than major banks. Some major banks restrict lot loans to 55 percent of a lots value whereas some smaller institutions lend up to 90 percent.
If you take out a loan on any kind of property, even raw land, you must buy flood insurance to cover the property if it sits in a flood zone as designated by the Federal Emergency Management Agency.
