How to Get a Land Development Loan

What should you review when originating a land development loan? Before you start the application process, review the four key elements: Pre-qualification, Pre-approval, Contingency, and Marketability. While the requirements of a construction loan vary, these considerations are critical for success.

 

Pre-qualification

Pre-qualification is a general approval process that allows borrowers to shop for land without committing to the purchase. It ensures that the borrower has adequate financial means and creditworthy business history. Most lenders perform pre-qualification when originating a land development loan to ensure that borrowers meet these criteria.

When determining the loan amount, a pre-qualification will require solid numbers from a builder approved by the lender. The lender and borrower will then work together to determine the scope of the project and cost estimates for the development. The lender may not choose a builder but will obtain cost data and use that information during the underwriting process.

The loan amount will be determined by comparing the value of the land before and after improvements are made. Typically, the final loan amount will be determined based on these assessments, based on the “as-is” and “as-completed” values of the property.

In addition, the loan amount is calculated on a “net present value” basis, which means that the lender will consider the projected return on investment in the improvements.

 

 

Pre-approval

Before applying for a land development loans, ensure you meet all of the lender’s requirements for the loan. Land loans are costlier than home loans, so the lender will want to see you have a good credit score and a steady source of income. A pre-approval letter will be valid for thirty to sixty days.

A fully underwritten pre-approval provides a detailed financial analysis of the land in question and a pre-approved amount. It is a powerful tool for those anxious about obtaining a loan, and it can beat out a cash offer, even in a competitive market. In addition, an experienced loan originator can often work with a real estate agent to convey pre-approval benefits to the seller.

Contingency

A land development loan protects you and the buyer from financial obligations. If the buyer cannot close the loan, you will have to investigate their ability to do so. This will take valuable time and energy. Whether you want to include a mortgage contingency depends on the market conditions.

When originating a land development loan, a lender may require you to put in a financing contingency as a condition of the loan. A financing contingency is a clause that protects the buyer from problems associated with obtaining financing, such as delays in the appraisal. The contingency is often very detailed and protects the buyer from penalties if the buyer cannot secure financing.

Marketability

The marketability of a land development loan depends on several factors, including how the property will be used and how much risk the bank will bear. Purchasing an existing home, for example, provides the lender with immediate, tangible collateral. On the other hand, developing a building on the land is riskier, as the developer may run into unforeseen problems or expenses that would cause the project to be delayed. For this reason, the marketability of a land development loan must be carefully analyzed before securing one.

Land development loans are an extension of credit for improving real property. Market analysis is the initial stage of the credit-extension process. If the property has sufficient potential for development, the marketability of a land development loan will be high.

 

 

Down payment

When originating a land development loan, it’s essential to have a solid credit score and ample down payment. Mortgages are often easier to obtain, but land loans can be more brutal to qualify for. There are several ways to find the loan that suits your needs. Community banks and credit unions are well-versed in the area’s economy and more flexible with customers.

Although mortgage loan requirements can vary from time to time, they generally focus on three factors: credit score, income-to-debt ratio, and equity in the project. The higher these factors are, the more likely you will receive approval for your land development loan. However, it is essential to note that land is relatively expensive compared to construction costs, so it’s wise to prepare for the possibility of a larger down payment before applying for a mortgage loan.