Private Mortgage for Vacant Land
What You Need To Know
Private mortgage lending for vacant land can be helpful in many situations. For example, if you are looking to own a vacant lot that is not zoned for development, a private mortgage lender can help you obtain the necessary funding to purchase the property then you can submit a request to the city for future development as you intended.
The underwriting requirements will vary depending on the private lenders, but at the very least, lenders will want to know your net worth based on income and assets, then they will decide on the best loan term they can offer.
At Canadian Private Mortgage, our clients know that we won’t steer them into products or financial terms that don’t fit their investment goals.
Income and assets can include proceeds from other real estate properties, a stocks and bonds portfolio, retirement accounts, stocks and bonds, mutual funds, or cash savings. Good credit history and a history of paying your bills on time will also be important for any private lenders.
Creative Financing For Vacant Land
Financing Guidelines for Vacant Land
Some banks are willing to make loans on vacant land, but they usually consider these a riskier asset. While unimproved land has a high potential value, it’s also less desirable as collateral than other types of real estate for banks.
Vacant land is particularly problematic for most lenders because it is considered too risky. Many lenders won’t provide loans on this type of land. Most mortgage lenders prefer not to own undeveloped land.
However, there are private lenders that offer private mortgage lending on vacant land because they look at the exit strategy to assess the risks when extending a mortgage loan.
Private lenders for vacant land real estate are different from residential mortgages. In addition to the standard loan requirements, vacant land real estate loans often require the borrower to form a business entity.
A business entity may be a corporation or a limited liability company. Often, business entities will have to provide individual principals with a personal guarantee to qualify for the loan. Minimum individual beacon scores range from 550 to 700, while business credit scores vary depending on the type of loan and credit reporting bureau.
Oftentimes, business owners do not have the financial history required by traditional lenders. In these cases, they may be asked to guarantee the loan as a personal guarantee. Then, as the owners and principals of the business, they must pay monthly installments of the loan.
In such a scenario, where a personal guarantee may not be sufficient to mitigate the risks, a joint venture may be a reasonable option.
Private lenders are an ideal option since they are not tied to the same lending guidelines as traditional lenders which is limiting. Unlike bank loans, private lenders focus more on the value of the property and cash flow potential from the commercial properties to determine the terms of the loan. This means that they will not make any preconditions on the borrower’s credit score or debt to income ratio.
A big advantage of hard money lending is that you can beat traditional lenders’ interest rates and timeframes. While traditional banks are known for their long loan terms, hard money loans can close in just days or weeks. This is important in large development projects, as time is money. Getting a commercial mortgage loan approved faster helps you complete the project faster and avoid delays.
Origination fee can also be referred to as “commitment fee”, or any other name. It usually refers to the underwriting or processing fee. This fee can cover a variety of expenses, from processing the loan to underwriting the loan. The amount of this fee depends on the lender and the type of mortgage loan. It is always stipulated in writing so there is no bad surprise to the borrowers on the closing day. If you are not sure how much you are paying for your origination fee, it is a sign that you are not working with an ethical private lender. Be aware and find other private lenders who are transparent with their origination fees.
At Canadian Private Mortgage, we disclose our commitment fee clearly in writing from the beginning of the process.
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