Mortgages & Home Loans Using Your Home Equity How To Use a Land Equity Loan The pros and cons of using your land as collateral By Kristen Rogers Updated on June 30, 2022 Reviewed by Lea D. Uradu Fact checked by Rebecca McClay In This Article View All In This Article Pros and Cons of a Land Equity Loan Using Land Equity for a Mortgage How To Get a Construction Loan Frequently Asked Questions (FAQs) How much equity is there in an acre of land? Photo: Steve Smith / Getty Images Land equity is the value of land you own, or the difference between the property’s market value and what you owe lenders. It’s similar to home equity, but it applies only to the land. You can use equity you have in land in a number of ways, such as for collateral for a land equity loan. Learn about how land equity works and your options for leveraging equity in your property. Key Takeaways Land equity refers to the value of a piece of land you own, or the difference between its market value and what you owe lenders.A land equity loan works similarly to a home equity loan, but it uses only land as collateral.If you’re building a home, you can use land equity as collateral for a mortgage or a construction loan. Pros and Cons of a Land Equity Loan A land equity loan is similar to a home equity loan in that it allows you to tap the value of your property, but the lender secures the loan with land as collateral. With a land equity loan, you use a portion of your equity to guarantee a loan, which means the lender can seize and sell your property if you fail to meet the terms of the loan agreement. This is similar to a home equity loan, in which the lender uses your house to back a loan. The collateral lowers the risk of lending to you because the lender can recoup some or all of the losses they may face if you fail to repay your loan by selling your property. Note Using a land equity loans means you could lose your property if you default on the terms of the loan. Pros Access to funds Lower interest rates Alternative to home equity loans Cons Risk of losing land Not all lenders offer land equity loans Pros Explained Access to funds: Land equity loans can be used for any purpose, much like a personal loan. They can help cover expenses such as tuition, bills, and other expenses, and can also be used to purchase a home or consolidate debt.Lower interest rates: Interest rates for land equity loans are typically lower than an unsecured loan since collateral is included. These loans can have either fixed or variable options, depending on the lender.Alternative to home equity loans: Another benefit of using a land equity loan is that it allows you to take out a loan without risking other assets such as a home, car, stocks, or savings account. Cons Explained Risk of losing land: When you use an asset as collateral, you take the risk that the lender could take it if you fail to meet the terms of the loan. With a land equity loan, your property is at risk of foreclosure if you default.Not all lenders offer land equity loans: Only some banks or credit unions offer land equity loans. They are not as common as home equity loans. Using Land Equity for a Mortgage Land equity sometimes can be used as collateral to qualify for a mortgage. In this case, you would need to own the land on which you are building a new home. If you use land equity as down payment, the lender may require you fully own the land and not have outstanding debt on it. Typically, 20% of the price of the home is required for a down payment for many lenders, although some programs may have lower requirements, such as the Federal Housing Administration’s FHA loan, which requires 3.5%. Note More commonly, land equity is used for a construction loan, which can eventually transition to a mortgage once the house is built. Applying for a Mortgage Using Land Equity The process of applying for a mortgage with land equity is similar to the process for applying for other loans. The basic steps include: Finding a lender that will allow land equity as a down paymentDetermining your preferred terms for the mortgage and lender’s requirementsChecking or improving credit score and determining debt-to-income ratioGetting an appraisal of the land to determine its value as collateralGathering any other income or financial documents necessarySubmitting an application for the mortgage How To Get a Construction Loan With Land Equity A construction loan is a type of loan used to finance the construction of a new house. It’s different from a mortgage because it focuses on the construction process, while a mortgage typically is used for a house that already has been built. It works in a similar fashion as a line of credit in that the lender provides the funds in increments as the construction progresses. Typically, the process of getting a construction loan is similar to getting a mortgage. Some construction loans even allow the loan to convert into a mortgage once the construction stage is complete. Frequently Asked Questions (FAQs) How much equity is there in an acre of land? Land equity is essentially the difference of the value of the land and what you owe on it. The value depends on the location of the land, zoning regulations, and whether the land is raw, unimproved, or improved land. Lenders value land in different ways. How does a land equity loan work when the land is sold? When property used as collateral is sold, the balance of the loan would be paid with the proceeds. The property owner then would receive any remaining amount. If the sale of the property does not cover the loan, the owner typically will be responsible for paying off the loan immediately, as the land could no longer be used as collateral. Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning! Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Federal Trade Commission. “Home Equity Loans and Home Equity Lines of Credit.” Cornell Law School. “Collateral.” FDIC. “FDIC: Consumer Assistance Topics.” U.S. Department of Housing and Urban Development. “Loans.” CFCU Community Credit Union. “Construction Loan.”