3 Types of Land Loan Collateral Lenders will Accept

Loan collateral is required on most large loans. Land loans tend to be expensive because the price of a piece of land is high in most markets. You will need to give the lender some assurance you will not default on this large sum. Your credit score and income are part of the assurance you can provide. Aside from these items, collateral is the strongest guarantee you can offer a lender. Consider these sources of collateral.

#1 The Land Itself

It may go without saying that the land you are purchasing will be used as collateral on the loan. Compare a land loan to a mortgage loan. With a mortgage, you do not technically own a property until the debt is paid off. The mortgage lender holds the deed. Your name may be on the deed, but the lien will show it is property of the lender until paid.  As you begin to pay the debt, you start taking over parts of ownership in the home. This is called your equity in the home, and you can even use this equity as collateral down the line. A land loan is very similar. You will not own the land outright if you buy it using debt. Instead, the debt holder will technically own the land until the debt is paid off. While this is the most common source of collateral, there are other options you can provide to additionally secure the loan.

#2 Property

If you own a piece of property, you can use this property as collateral on essentially any other loan. This includes a home, car or office building. Any physical asset owned by you can have a lien added to it. A lien must be added officially, and the lender will typically take care of this step for you and charge you closing costs for doing so. The lender files the lien with the county registrar in the county where your property is owned and registered. If you intend to make changes to the property, such as selling it or using it as a lien on another loan, the registrar will verify this is allowable based on any current liens.

#3 Stock and Savings

Physical assets are not the only ones that can be mortgaged through liens. Investments and savings can also be used to secure a land loan. In this case, you will benefit by knowing interest is still being earned on the asset while it is held by the lender. In the example of a stock certificate, you may not want to liquidate the stock and surrender potential future earnings. As such, you can take a loan against it, and the stock certificate is only held by the lender for a short period of time. If the loan charges 5% interest and you gain 2% on the stock during that period of time, you will actually only be paying 3% interest on the loan. Savings accounts and other investment products can be used to secure loans under the same principles. 

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