Land Development Loan Options

What Kind Of Down Payment Is Required With A Land Development Loan? 

While lenders are willing to fund a land development project, they typically require a larger down payment, since the land does not have that much value. The value could increase once it’s developed, but buyers could default on payments before any significant value has been established. Because of this, lenders often require a down payment between 25% and 30%.

Can The Land Itself Act As Collateral For A Land Development Loan? 

The land can act as collateral to secure the land development loan, but there are two things to keep in mind that may prevent this from happening:

• The development loan is more than the purchase price of the land.
• The land is still serving as collateral for a land purchase loan. 

If the development loan is more than the current value of the land, then additional collateral may be needed. 

For the second scenario, the land will most likely not be able to be used as collateral because it’s already tied up with another loan. Sometimes lenders are willing to take the risk of securing a loan with an asset that has already been collateralized, but it’s not a guarantee. The reason is that, as the second lender, they would not have the first right to the asset if the borrower defaults on their loans. That’s why many lenders are not willing to accept an asset that has already been used as collateral.  

Lenders that do accept collateralized assets typically already have an existing relationship with the borrower and have confidence in their ability to repay the loan. However, even with a positive history, they are still likely to charge a higher interest rate than they would otherwise.

What Are The Interest Rates For Land Development Loans?

The interest rate on property development loans will vary from borrower to borrower, depending on the loan amount, credit score, down payment amount, and collateral used to secure the loan. Overall, land development loan rates are higher than small business term loan rates because of the greater risk. 

Also, keep in mind that interest rates aren’t the only cost associated with a land development loan. Other costs include:

• Appraisal fees
• Loan origination fees
• Survey fees

Speak with a loan officer to get a better understanding of land development rates and commercial mortgage rates. 

How Long Is The Repayment Period For A Land Development Loan?

Repayment periods for land development loans are usually between 3 and 10 years, but exact lengths vary between lenders and borrowers.

Pros and Cons of Land Development Loans

Are There Other Types of Construction Loans? 

There are several types of construction loans, some of which include mini perm loans, A&D loans, and interim construction loans. Here’s what you need to know about these options.

• Mini perm loans – Typically has a three- to five-year loan term and is used to finance the construction or renovation of a commercial property, often requiring a balloon payment at the end of the term (although this can often be avoided through refinancing)
• A&D loans – Standing for acquisition and development, can be used for both the purchase of land and its development 
• Interim construction loans – Covers the costs of construction, with borrowed money coming in installments, and lenders typically only requiring interest-only payments during the actual construction process  

A land development loan helps cover the expenses related to getting undeveloped land ready for construction. Land clearing, grading, and installing infrastructure can all be very expensive, and a land development loan helps pay for those costs. However, there are other types of commercial real estate construction loans that may also work, too. Other options include mini perm loans, interim construction loans, and A&D loans. 

Learn more about commercial property loans today with Lendio.