Can Bridge / Hard Money Loans Be Used for Land Purchases?
When it comes to purchasing a home, commercial building or land, there are multiple types of loans for an investor to explore. But when you are purchasing land, it is important to know what a lender may consider as well as what loan may best fit your needs.
As a real estate investor, construction and lot loans are options, but are they the best fit for your financial needs?
Bridge loans, or hard loans, can be used for land purchases, but lenders may view land as something beyond the traditional land to build or land for sale situation.
Land Investment Loans: What Do Lenders Consider Land?
In the eyes of a lender, "land" refers to real property that can be used as collateral for a loan, particularly in the context of mortgages or construction loans. Lenders view land as a type of asset with a value that can help secure repayment of a loan in case the borrower defaults.
Here are key aspects of how lenders view land:
Collateral Value: Land has intrinsic value, and its worth can be determined through property appraisals. This value helps the lender assess the level of risk in lending money to the borrower. If the borrower defaults, the lender can foreclose on the land to recover the loan amount.
Marketability: Lenders look at whether the land is easy to sell or lease in case of foreclosure. Factors like location, zoning, and development potential play a role in the land’s marketability.
Type of Land: Different types of land (residential, agricultural, commercial, etc.) are valued differently. Lenders might be more willing to finance developed residential land because of the higher demand and ease of resale compared to undeveloped or agricultural land.
Loan-to-Value (LTV) Ratio: Lenders use the land’s appraised value to determine how much they are willing to lend. A typical LTV ratio for land is lower than for developed properties because land can be riskier or harder to sell.
Zoning and Development Potential: Land with zoning restrictions or that is difficult to develop might be seen as less valuable to a lender. If the land is zoned for commercial or residential development, it could be viewed more favorably, especially if it has future growth potential.
In short, land serves as both a form of security and an asset in the eyes of a lender. The lender will assess its value, potential for resale, and other risk factors to make a lending decision.
Types of Land
When it comes to hard money loans, the term "land" can refer to a wide range of properties, and what lenders consider "land" can vary based on the specific terms of the loan. However, generally, lenders use "land" to refer to an undeveloped, vacant plot or parcel of real estate, without significant improvements or buildings on it.
Undeveloped or raw land is the most common type of land in the eyes of a lender, coming as a vacant, undeveloped parcel that doesn’t have substantial improvements like buildings, roads, utilities, or other existing infrastructure. This could be a plot of forested land, a vacant residential lot, agricultural land, or rural land that hasn’t been developed or built on, for example.
Land with buildings on it can be considered land too, as lenders will still call a property “land” even if it has buildings or existing structures on it (as long as the structure is not fully developed or suitable for immediate use). For example, if there’s a house or a small structure on the lot but the building is uninhabitable or in need of significant repairs, some lenders may classify it as “land” in order to issue a loan.
Image by Cole Ankney
Why a Hard Money Loan for Land?
Borrowers often turn to bridge loans or hard money loans for land because these types of loans offer certain advantages that traditional financing can't always match, especially when time or flexibility is a key factor. Here are some common reasons:
Speed of Approval: Bridge and hard money loans are typically much faster to secure than traditional loans. Traditional mortgages for land can involve lengthy approval processes, with a lot of paperwork and checks. With hard money or bridge loans, borrowers can often get funding within days, which is crucial in situations where time is of the essence, such as when they’re in a competitive bidding situation for a property.
Flexibility: These loans are often more flexible in terms of qualification criteria. Traditional lenders typically have stricter requirements for land loans, such as needing the borrower to have a substantial credit score and a solid income history. Hard money lenders are more concerned with the value of the land itself as collateral, which can make it easier for those with less-than-perfect credit to qualify.
Land Use and Zoning: If the land is raw or undeveloped, traditional lenders may be unwilling to provide loans due to the risk involved. Bridge and hard money loans can be more willing to finance land in various conditions, including properties that might not yet have clear zoning or development approvals.
Short-Term Financing: Bridge loans are often used as a short-term financing solution, helping borrowers secure land and hold it until they can secure more permanent financing, such as a traditional mortgage or a construction loan. Hard money loans, too, are typically short-term (often 1-3 years), allowing the borrower to make improvements to the property or develop it further to increase its value before refinancing or selling.
Less Bureaucracy: Hard money lenders are usually private individuals or companies, which means the approval process is less bureaucratic and more based on the relationship with the lender and the collateral’s value. Traditional lenders, like banks, are more rigid in their processes.
Explore Private Lending for Land with Capstone Capital Partners
If you are looking into purchasing land, exploring a bridge loan, and need the assistance of a private lender with flexible terms and competitive rates, look no further. With Capstone Capital Partners, you get the assistance of financial experts with a proven track record of providing a smooth, hassle-free loan experience for borrowers all across Texas.
To get pre-approved in as little as 24 hours or to speak with one of our team members, answer a few short questions, and we will be in touch!
