Should You Use a Home Equity Loan to Buy Land?

Buying land with a home equity loan is possible, but you must meet strict requirements to qualify.

Plot of land being developed.
Ekaterina Goncharova/Getty Images

Using your home's equity to buy land isn't as simple as using it to finance a home renovation, but it's possible. If there's a plot of land you simply must purchase, you can borrow against the equity you've built up in your home, along with other options.

One such option is taking out a home equity loan, which is a second mortgage that provides you with a lump sum of cash at a fixed interest rate. You can pay it back over a long repayment -- typically 20 years -- which helps to keep your monthly payments low.

How to use home equity to buy land

A land loan is simply a loan used to finance the purchase of a vacant plot of land. If you're so inclined to use a home equity loan to buy land, the requirements to qualify are more stringent than if you borrow the money for more conventional reasons, such as remodeling your home's master bathroom. For some, it may be harder to qualify to buy land than it would be for a first mortgage -- you'll need to have exceptional credit, a sizable income to qualify and enough money saved up for a significant down payment. 

With a home equity loan, you can have a repayment term of up to 20 years, so it's important to understand the nuances of the process before putting your home up as collateral to secure the loan.

"There are instances when using equity to acquire more real estate can pay off for an investor who is very cognizant of the risks, and has done this before," says Greg McBride, chief financial officer at CNET's sister site, Bankrate. "Generally, you don't want to put your principal residence at risk to acquire other real estate that's more speculative in nature," he says.

Pros and cons of buying land using home equity

Before starting the application process, make sure you've considered the benefits and drawbacks of using home equity to buy land because it's a large loan that you could be paying back for as long as two decades.  

Pros

  • Build a new home: You can build your ideal home on the property, and deduct the interest from your taxes, too.
  • Flexibility: Once you buy the land, it's yours to do whatever you want with it. You can take your time deciding how best to use it. 
  • Fixed interest rate: Your interest rate will remain the same for the entire period of your home equity loan, even if economic factors such as inflation continue to push rates up.
  • Record home equity: Right now, most homeowners have more equity than they did two years ago, which means you'll likely have access to more funds for financing. 

Cons

  • Your home is your collateral: Your home secures your loan and is at risk of foreclosure if you miss multiple payments because it's the only asset that's securing your loan.
  • Limited loan availability: Not all banks and lenders offer land loans so your choices for borrowing are limited, but it's still important to interview as many lenders as you can to get the best rates and terms available.
  • It's hard to sell your land: If you own land -- any type of land -- it's likely that there will be just a small pool of buyers and investors who'll be interested in purchasing it. And depending on its location, the land itself may not increase in value over time.
  • Additional expenses: There are high closing costs and fees associated with buying land. Also, if you plan to build a home on the land, you'll need to budget additional funds for such issues as construction delays and building setbacks.

What you need to consider when using a home equity loan to buy land

Your costs will vary depending on the kind of land you buy and what you plan to do with it. The types of land you can buy are raw, unimproved and improved land.

  • Raw land: It can be harder and more expensive to get financing for raw land because as the name implies, it's bare land with no access to utilities or roads and has no improvements.
  • Unimproved land: This type of land may provide access to some utilities, but it still lacks other improvements, such as a phone line or a meter for gas or electricity. Obtaining financing for unimproved land is easier than for raw land, but it can still be challenging.
  • Improved land: Although it's typically more expensive to buy this type of land than raw or unimproved land, it has access to roads and to utilities and is ready to build on it. Securing financing for improved land is easier than raw or unimproved land.

What's more, you must be prepared to make a sizeable down payment to comply with Federal Deposit Insurance Corporation, or FDIC, regulations.

Percentage of minimum down payments

  • Raw land: 35% 
  • Unimproved land: 25%
  • Improved land: 15%

How do you apply for a home equity loan to buy land?

Applying for a home equity loan to buy land is essentially the same process as applying for a mortgage. A bank or lender has to be willing to lend you money, so you'll need to provide documentation of creditworthiness, your income and stable employment. To be an attractive candidate for loan approval, you'll want to have a low debt-to-income, or DTI, ratio of 36%. For a land loan specifically, you need to have a sizeable down payment saved up, typically anywhere from 15% to 35%.

Alternative land financing: Construction loans 

If you don't qualify for a home equity loan, there are other avenues to help you seek financing. One common option is a construction loan, which is ideal if you're planning to build a home on the lot. However, construction loans often have higher interest rates or variable interest rates, as well as shorter repayment terms than home equity loans, so you have to make sure you can afford the higher monthly payments. 

If a construction loan doesn't fit your budget, you can also qualify for financing through other types of loans such as a US Department of Agriculture loan -- which can help you to qualify for a lower down payment, for example -- or an SB 504 loan through the Small Business Administration. 

The bottom line

If you want to use a home equity loan to buy land you'll need to meet strict requirements for income, credit score and down payment in order to qualify. Keep in mind that using a home equity loan to buy land isn't for everyone and is typically best for experienced investors.