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Obtaining Land Loan For Undeveloped Property Is Tough

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August 31, 2007

It is sometimes more difficult to obtain a land loan than to get a mortgage for developed property. Some lenders are reluctant to offer loans strictly on land, especially if there are no plans to improve the land with housing construction, for instance. If the land loan is for undeveloped property with no utility services installed, or at least nearby, the prospect for getting a loan goes even lower.

On most occasions when a person seeks a land loan for property on which to build a house, the price of the land is incorporated into the cost of the entire project. As such, the entire value of the home and property are included into one loan. How much of a down payment required will be determined by the credit worthiness of the borrower. In other instances a person who already owns a home on their property and seeks to purchase an adjacent lot, can obtain a land loan using the adjoining improved property as collateral for the loan.

There is always the possibility of obtaining a land loan for free-standing property, that is land that is by itself, provided the borrower has sufficient equity to use as collateral as well as a good credit history. In most incidents, the odds of being granted a land loan are better for property with utility improvements in place, but with a considerable history of good business with a lender, a land loan can be granted with little money down.

Reason People May By Unimproved Land Only

There are speculators who may be interested in purchasing unimproved land as an investment, if they feel the land?s value will rise and they can profit from a subsequent sale. For example, obtaining a land loan for a parcel of land can pay off big if a future need for the land grows. Retail space, office complexes or residential housing needs may prompt the price of land to significantly exceed the original purchase price.

A land speculator that can place a large enough down payment to obtain a land loan at a reasonable rate can afford to own the land for a long time before the opportunity arises to sell. In some cases, the buyer of the land may have information about a future project and knows they can realize a good return on their investment in a short period of time, enabling them to pay off the land loan early and receive a reduction in interest rates.

Other reasons people may attempt to get a land loan is to prevent future building, especially in some neighborhoods. With no intention of developing a piece of property a landowner may take out a loan to by nearby property to prevent commercial or industrial expansion. Their belief is that as long as they own the property, their quality of life in their current home will remain status quo.

When applying for a land loan, in addition to credit rating and the ability to pay lenders will also look at the ownership history to make sure the deed is free of liens from previous loans. They will also search the title to make sure there are no easements within the property deed to prevent the new owner from using the land for a specific purpose.

In past times, some landowners sold their property with the expressed prohibition of certain activities, such as the building of a specific type of industry or business, and depending on the length of time applied to the deed restriction, subsequent owners may be blocked from using their land as they deem fit. This can add to the trouble of clearing a land loan.

In rare cases a court may remove the restrictions, but normally unless the limit places undue hardship on the new owners, it will remain in place.

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