An Introduction To Financing Undeveloped Property

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An Introduction To Financing Undeveloped Property

An Introduction To Financing Undeveloped Property

After you’ve found the perfect piece of land to build on, the next natural step is to get financing. Securing money for undeveloped property is different from other types of financing, though. Before you start shopping around to find the best financial deal, read this introduction to learn the ins and outs of getting a loan.

What Kind of Loan do You Need?

The first thing to determine when financing land is what kind of loan you need. You may get a loan for either a lot or for land. If your property is vacant and undeveloped, you typically need a land loan; the difference is in how finished your property is. The size of your land may also determine what kind of loan you may apply for, as some large, undeveloped properties are more likely to be classified as vacant lots. Terms for land loans are sometimes more strict because a soon-to-be-constructed new home cannot be used as collateral. However, planning to build a commercial building or home makes it simpler to secure financing.

Are the Terms Different?

The terms for land loans are often different than those of other loans. The property itself serves as the collateral, making land loans a risky investment for lenders. Because of this, interest rates and down payments are sometimes higher you might find with other loans. Down payments are often required to be at least 20 percent and at times range up to 50 percent if you don’t have plans for immediate development. Land loans also tend to be shorter than the average loan, with lenders giving you between a few months and a few years to pay off your loans. This is because your lender is planning on your land being developed relatively soon. Additionally, land loans are frequently amortized over shorter time periods.

How Do You Get Them?

You have several different options for getting a loan for your undeveloped property. If you plan to develop your land immediately, you might seek financing through a bank or credit union. The offered rates are usually competitive; however, they may not finance land over certain acreages. Another option is seller financing. The terms of these loans are between you and the previous land owner; this is typically short-term financing. Because seller financing terms can differ, you may want to have an attorney’s advice if you choose to go this route. To increase your chances of securing funding, take the time to show your lender that you have a workable plan for your land and that it meets all zoning requirements.

Financing your undeveloped property doesn’t have to be difficult. You simply need to know where to start.

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