How To Get Loan Against Land Property
Getting loans by providing collateral is a universal norm. Loan against land or property is one of the most common forms of lending. However, during these uncertain economic times, where prices of land and other fixed assets fluctuate every day, getting loan against land property can be cumbersome.
Usually, mortgaging your land to borrow money should not be a difficult proposition. However, with the real estate market witnessing a drastic makeover and land prices not showing any clear direction, getting loan against land has become an uphill task. Though compared to other assets, like gold, vehicles or business assets, borrowers are more likely to part with their land when they are not able to pay back their loan. However, with the prevailing shaky mortgage landscape, lenders have become more risk averse. They think twice before offering loan against land property as getting possession of the mortgaged land in case of default by the borrower can be a long drawn process.
But you don’t have to lose hope just as yet. There are specific loan products for specific purposes available in the market. With proper preparation and approach, you sure can get the appropriate loan that suits your needs at a reasonable rate of interest and other terms and conditions.
Targeting specific types of Loan
If you have a land that is vacant, it may not be attractive for lenders to offer you a loan against it as a security. Normally, you are likely to get a construction loan to build a house. This type of loan is suitable for one-time need of homebuilding. This typically requires repayment in 6 to 12 months after financing, when your home construction is complete.
Generally, up to 80 percent of your land's market value plus the cost of construction determines the amount of money that you can borrow. However, you should be aware that even if you are not able to complete the construction, you're still required to repay the loan. Your repayment liability doesn’t change.
Another form of borrowing known as land-equity loan or line of credit is a little more flexible. This lump sum loan, offered with fixed or variable rate of interest depending on who the lender is, can be used in whatever way you want to. It is quite similar to any other secured loan, where instalments are a combination of principal and interest. The loan amount is determined by your actual equity or land value. This loan amount will always be lower than the fair market value of your asset to cover any risk of price fluctuations.
Choose the Right Lender
Credit unions, private lenders and local banks are often more likely to provide loans against land as security as compared to larger banks, especially if your land is vacant. Paul Noring, managing director of the financial risk-management practice at Navigant Consulting, while speaking to the Washington Post in 2017, said, “For consumers, it doesn’t really matter whether you get your loan through a bank or another lender, although in some ways non-banks are a little more nimble and can offer more loan products."
If you're using land that also includes the home in which you live as collateral, then your borrowing possibilities increase a little more. You can get access to traditional loan options like personal loans, small business loans, secured loans, home-equity loans and consolidated loans, etc.
It is more desirable for the creditor, if you use your home to secure a loan but it would be riskier for you. Always try to find the lowest APR possible and make absolutely sure that you'll be able to afford the loan repayment for the long haul, or else you will risk losing your home.
Always Be Prepared
To increase your chances of obtaining a loan against land property, it's vital to have a foolproof plan before filling out the loan application. Of course, having a healthy credit score and well-located and easily accessible land that you own outright with all the utility services will always stand you in good stead as far as the best loan option is concerned.
For a construction loan, try to find an agent who isn't affiliated with the builder. It helps buffer you against the builder's interests and can put a valuable neutral negotiator in your corner. For whatever type of loan you want to take against land as security, be it working capital loan for new business, make sure you have a proof of a professional appraisal or a land loan calculator, your property deeds and land surveys along with the usual financial statements like, bank statements, income proof, identity proof, tax returns and current loan or lease agreements.