7 Common Mistakes to Avoid with Land Development and Construction Loans

Developing land and building structures takes time, effort, and money. That’s why it’s vital to make sure that you avoid any common mistakes when taking out a land development or construction loan.

This blog post will discuss seven of the most common mistakes people make when applying for these loans. By knowing what to avoid, you can save yourself a lot of hassle and heartache.

1) Do Your Research, Such As Comparing Rates And Terms With Other Lenders

When you apply for ground-up construction hard money loans, the lender will scrutinize your project heavily to make sure it is a wise investment.

You need to do your homework and compare rates and terms with other lenders before signing on the dotted line.

Don’t forget to factor in construction costs when budgeting for your loan.

2) Know What Your Credit Score  

A low credit score will result in a higher interest rate, which means you’ll pay more for your loan. So check your credit score periodically to identify areas where you need to improve.

For example, when applying for residential land development loans in Houston, a credit score of 640 or higher is required to get the best interest rate.

If you have a lower credit score, options are still available, but it’s essential to be aware of the potential consequences before applying for a loan. For example, you may have to make a larger down payment or not be approved for the loan.

3) Not Checking for Zoning Changes

If you’re planning on developing a piece of land, it’s crucial to ensure that the zoning hasn’t changed since you last checked. Zoning changes can completely throw off your plans, and they can be costly to change.

Make sure you’re constantly checking for updates from the city or county where your land is located. That way, you can be prepared for any changes that might come up.

For example, if you construct a house in a rural area, you might not be too worried about zoning changes. However, if you are constructing a high-rise in a downtown area, any change in zoning could significantly impact your project.

If you’re not sure how to stay up-to-date on zoning changes, reach out to a local attorney or real estate professional. They should be able to point you in the right direction.

4) Not Checking the License of the Moneylender

Before signing on the dotted line, check that the moneylender you’re working with is licensed. It may seem like an obvious point, but it’s often overlooked – and can have disastrous consequences.

A licensed moneylender will be regulated by a government body, which means they’ll be held to certain standards and must follow specific procedures. It protects you, as the borrower, from being taken advantage of.

You can check the license under the Registrar of Moneylenders, which is a public record.

5) Choosing the Wrong Type of Loan

There are different types of ground-up construction hard money loans available, so make sure you choose the one that best suits your needs. For example, an interest-only loan may be suitable if you’re only planning to develop the land for a short time.

If you’re looking to construct a property on the land, you’ll need a construction loan. This type of loan is specifically designed to fund construction projects, and it has different features than other loans.

For example, construction loans usually have a ‘drawdown’ feature, which allows you to access funds as you need them during the construction process. It can be helpful if you’re working with a tight budget.

6) Not Verifying the Appraisal

An appraisal is an assessment of the value of a piece of property. It’s essential to get one before you take out a loan for land development or construction because it will be used to determine how much money you’re able to borrow.

7) Not Understanding the Loan Process

The loan process for land development and construction loans can be complicated. Make sure you understand all of the steps involved before applying for a loan.

For example, you must gather all the documentation required, such as the plans for the project, before you can even begin to fill out a loan application.

Final Thoughts

There are a few critical mistakes regarding land development and construction loans. By being aware of these potential pitfalls, you can put yourself in a better position to succeed.

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