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Can I Use Raw Land as Collateral for a Loan?

Raw land, also known as undeveloped land, can be difficult to value and consequently many banks prefer not to accept it as collateral. However, it is not universally unacceptable as collateral. Whether you can use your raw land as collateral for a loan will depend on the value of your land, your plans for the loan, the size of the loan, your down payment and your lender's personal discretion.

  1. Loan-to-Value Limit

    • The loan-to-value limit is the ratio of the loan you are requesting to the value of the asset you are putting up as collateral. The Federal Deposit Insurance Corporation (FDIC) sets the supervisory loan-to-value limits, which is the maximum ratio a lender is allowed to accept. For raw land, the supervisory limit is 65 percent. This means you cannot borrow more than 65 percent of the land's value using only that raw land as collateral. Banks, however, may choose to set a more stringent loan-to-value limit for their internal use.

    Land Development

    • If you want a raw-land loan to fund development of that land, different rules will apply. The FDIC land development loan-to-value supervisory limit is 75 percent of the expected value of the land post-development. However, banks are often wary of awarding these loans due to the uncertainty of development projects. It is difficult for the bank to judge ahead of time how valuable the project will be upon completion and how much revenue it will generate to pay back the loan. When approaching your lender with this type of project, bring as detailed and clear a project proposal as possible to improve your chances of receiving the loan.

    Valuing Land

    • Valuing raw land can be very difficult, making lenders wary of accepting it as collateral. Raw land values fluctuate based on surrounding development and demand in your area. Any drop in real estate demand can dramatically reduce raw land values. Having similar parcels of land sold recently will help to establish the value of your raw land but can't guarantee that it will hold its value. Land that already has utilities and sidewalks built has a higher value, with such amenities having consistent value of their own.

    Considerations

    • Overall, raw land is a poor option for loan collateral. Having a good development plan will help your case but it's ultimately up to your lender. Look for a lender who specializes in raw-land loans for the best chance of having your land accepted as collateral. Alternatively, use another asset, such as your car or home, instead of, or in conjunction, with your land to form the collateral.

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