Land has always held value in the United States, and if you have a clear deed to real estate property, you may be able to use it as collateral for a loan.
In this article, we'll examine the steps a borrower needs to take to obtain loans against a land deed.
There can be a lot of paperwork involved in land ownership. Your first step is to make sure your paperwork is in order and the property deed is in your name. You can find out through the County Recorder's office in the county where the property is located. Land deeds are a matter of public record, so anyone who wants this information can obtain it.
A recorded deed provides notice to subsequent purchasers, lenders, and the general public about a parcel of real property. It also protects the owner of record in the event multiple parties claim ownership of the same land.
When a property transfers from one owner to another, you must update the official documents. A failure to accurately record the required documents can invalidate the transfer.
After you've confirmed that your name is on the deed, your next step is to find a lender that will loan against a land deed. Land loans can be hard to find. Some lenders do not accept land as collateral at all, and others only consider land that is worth a certain amount. Most lenders will not loan on land that belongs to more than one person.
If you have bad credit, you'll have a tough time securing a land loan. When your credit is not a factor, your loan eligibility will depend on the type of property you own and its location. If you own prime land that is zoned for commercial use in a busy urban area, your loan has a good chance of being approved. If it's located right off the interstate, your chances are even better.
However, if you own a few rural acres miles away from a city center, finding a lender may be challenging. The bank is looking at the land's profitability, meaning how easily it can be converted into cash if you default on your loan. In the case of rural property, you may have better luck with a small local bank than a larger institution. A local banker may better understand the value of your land.
Once you have identified a lender and the lender has confirmed that the land is valuable enough to serve as collateral for your loan amount, you will be able to complete the loan process with the following steps:
If these steps are completed to the lender's satisfaction, the lender will then discuss the terms of the loan they are willing to offer. When you and the lender have agreed to the terms and the loan is issued, the lender will record a lien on your land title.
Lenders typically see vacant land as a riskier investment than land that is already in use. Buildings can be sold or rented out, while it can take a long time for vacant land to produce any cash flow. Once again, you may have better luck with a local bank than with a large one.
If you seek to use the vacant land as collateral for a loan to fund a construction project on the property, that's a different story. The lender will examine the financial strength of your project, and, if it likes what it finds out, it will disburse funds as you meet your construction milestones.
Interested in learning more? Check out our article, Basics of Land Investing.
If you're seeking a loan against the assets of a land trust—called a land trust mortgage—you'll need to check the trust deed to make sure that the trust has the power to borrow money.
Then, you'll need to ask the trustee to sign the mortgage or note.
If the property is already in a land trust, and you want to borrow against the beneficial interest, then the lender will need to serve what is called a "Notice of Collateral Assignment" on your trustee. Your trustee will then need to write an "Acknowledgment of the Assignment" in response. Afterward, the trustee will not be able to transfer the title of any property held in the trust without the lender's written consent.
Just as with any loan, you must pay back a land loan according to the terms of your loan contract. If you default on the loan, the lender can take possession of the land and sell it to pay for the amount you owe.
On the other hand, when you repay your land loan's full amount, the bank will cancel the lien on your deed. At this point, the lender has no further claim to the land.
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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