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Using Land As Collateral For Home Loan
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One of the most frequently asked questions is the amount of down payment required for a farm or land loan. This article describes the factors that determine the required down payment. One of these factors is the type and quality of collateral. The collateral is the free and clear property of the applicant. This asset can be mortgaged for partial or full payment.
If the borrower fails to meet the terms of the loan without payment, the guarantee can serve as part of the repayment of the loan. Borrowers sign a promissory note stating that they will do whatever it takes to make sure their loan is repaid. This means that all real estate assets can serve as a source of repayment in the event of loan default, not just tangible collateral.
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In the case of real estate loans, additional real estate is a qualified asset. FCS Financial will not secure a real estate loan with a vehicle. Most vehicles depreciate from the date of purchase. Generally, the value of a vehicle in 12 months is less than the value of that vehicle today. If not, land prices are expected to remain low.
Each situation is unique, but there are often two scenarios. Either a full cash down payment or use the equity in other real estate properties free and clear of any existing mortgages.
Claire wants to buy 40 acres of vacant land for $100,000. Down payments on farmland are often around 30 percent, so Claire can apply for a loan for $70,000 but needs a $30,000 down payment. Clear’s payment option is to use existing property equity as a down payment instead of cash.
Claire already owns 15 acres nearby at $2,500 per acre, for a total of $37,500. Claire has $5,000 in cash to contribute to the down payment, and she decides to mortgage the 15 acres she owns. New property. Many lenders will not lend more than 70 percent of the new property’s value.
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Lenders use the loan to value ratio of the security (property) to determine the amount of risk they are willing to take. This means that the lender takes the loan amount and divides it by the value of the mortgaged property and the value of any collateral. Claire’s loan amount is $95,000, so she needs at least $35,700 extra to get a 70% loan for the cost of the security position. Using the 15 acres she owns, she can get into the security position she needs with a $5,000 cash down payment.
She decides to mortgage 15 acres she owns for a down payment of 40 acres. The seller will receive $5,000 in cash, making the loan amount $95,000, and the lender will also purchase a deed of trust to satisfy the loan on the fifteen acres it already owns and a pro rata share of the security value.
*This example does not include any fees that the lender may charge for appraisals, title work or original documents. In addition to the down payment, funds are required to cover any assessed fees. A lender may offer these fees, but be sure to ask about them.
A deed of trust is a recorded document where legal title to property is transferred to a trustee who owns the trust as security for both the lender and the borrower. The trustee holds title until the loan is returned to the lender. All deeds must be recorded with the county recorder. Once the loan is paid off, the borrower issues a deed of trust stating that they no longer have a lien on the property.
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More information on collateral is provided in the video below or to learn more about the land loan application process, contact one of our local loan officers. By: Ryan Cockerham | Reviewed by: Alicia Bowden, Certified Ramsey Solutions Master Financial Coach | Updated on January 28, 2019
If you want to get a secured loan, land can act as a solid form. Depending on the size of the loan you need and your previous credit history, you may need to use something significant like property to secure the funds you need. Fortunately, officially listing your land can be done without too much hassle. Once your land has been appraised by a qualified professional, you can begin the process of converting your property holdings into qualified collateral.
Although land has historically been considered a form of collateral, you may find that some borrowers are more receptive to the idea than others. With this in mind, the first step to using your land as collateral is to identify a range of suitable lenders and then review and compare their loan terms and conditions. Remember that the first choice is not always the right choice when choosing your preferred lender. Always make sure that you find the best possible terms, including important parameters such as interest rate and repayment period that match your needs.
If you intend to use your land as collateral, the next step is to determine how much your land is worth. Given the variety of factors that can affect the value of your real estate, an appraisal is essential before committing to your loan. To do this, you need to hire a professional appraiser approved by your chosen lender. Once the value of your land is finalized, your lender will be able to offer you loan terms that you can accept or reject as you see fit.
How To Use Land As Collateral For A Secured Loan
After your appraisal is complete, your lender will check your property for any additional liens or liens. If so, it can directly affect your chances of getting loan approval. Remember that the condition of your land and its current level of development will affect the terms of the loan you are offered. For example, if your property is in a residential area and there is currently a house in the building, you can offer a higher percentage of the land value as a loan. If you do not own the property on your land, you will be offered a lower percentage of the land’s value.
Regardless of the details, it’s important to remember that you have the option at any point in the process to exit these negotiations and find an alternative lender. Using your property as collateral represents a significant financial move that should only be entered into under appropriate circumstances. Make sure you are comfortable with the terms of the loan before proceeding.
As a general note, remember that the interest rate for using land as collateral is often very high. In some cases, the interest rate can reach 15%. This interest rate is often compared to unsecured forms of credit, such as credit cards. If another form of collateral is available to you, it may be worth your time to explore what those options are. This is an important consideration, especially in situations where you want to stretch your payments over a longer period of time.
Ryan Cockerham is a nationally recognized author specializing in all things business. His work has served the business, non-profit, and political communities. Ryan’s work has been featured in PocketSense, Zacks Investment Research, SFgate Home Guides, Bloomberg, HuffPost, and more.
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