Financing undeveloped property purchases is not the same as financing already-built home purchases. In fact, the type of loan that you would need for vacant land is much different than the loans you take out to buy homes that are already constructed. In addition, there are a few reasons that the banks treat undeveloped land loans differently. To better understand how undeveloped land and lots are financed, it is essential to understand the characteristics of the loans used as well as their terms and requirements.
First, it is important to know that lenders may differentiate between land loans and lot loans. Although lots and pieces of land are both types of undeveloped property, the terms for the loans needed for them can be different. For instance, the underwriting and terms for a lot with utilities and a road might be less strict than with a loan for some undeveloped land. Good, finished lots typically will make the lender feel more comfortable, as they are more ready for home building.
As a borrower, there are some differences to note between lot and land loans and regular bank loans to understand better the loan process for undeveloped property. These differences may depend on the current market conditions and the financial institution you are borrowing from. One such area is availability. Some banks may not offer loans for undeveloped land or lots. Reasons may include a poor history with these types of loans, bad market conditions and regulatory constrictions. Because land and lot loans are less readily available, a borrower will have fewer options and not as much room to negotiate.
Another difference is interest rates. Although they may differ, as compared to purchase money loans for home buying, lot and land loans have relatively high interest rates. Loan length is additionally different for undeveloped property loans. Many people are familiar with mortgages for homes that last 30 years. Loan term lengths like that do not typically exist for lot and land borrowers. Undeveloped lot loans may have payoff dates that are only a few years or perhaps months away. This is because lenders may anticipate that the borrower will build a home soon and pay the lot loan off with a permanent or construction loan. A borrower may even have to commit in a written statement that they will begin constructing a home by a specific date.
Knowing these aspects of undeveloped lot and land loans can help you to understand how these types of property are financed, how lenders view these loans and how borrowers must properly prepare for this type of financing.