June 25, 2018
Some people would rather build a home from the scratch than buy an already existing property from the market.
A new home construction gives you the opportunity to customize the designs and add particular features to make your home more comfortable and beautiful.
While this sounds very attractive, securing the lot and land loan to achieve this dream may not be very easy. Don’t be too quick to blame the lenders, in this post we will discuss some of the reasons lenders tend to prefer providing loans for the purchase of existing homes rather than ‘bare land’ for new home construction.
There are some difficulties in securing lot and land loans, but it is possible to get them if you can meet the requirements of the lender. Depending on your financial status, credit score, income, and the particular investment requirements will be presented by the lenders according to their assessment of the project. The loan application for new home construction will be granted when the lender is satisfied that you can fulfill your end of the deal.
Given the stringent conditions many lenders will present before providing lot and land loans, some customers may be tempted to consider the other less difficult option to purchase an already existing home. This is a deal the lenders are more comfortable with, but it will not be ‘a dream come true’ for people who would prefer new home construction. So let’s discuss why the banks are so reluctant to provide lot and land loans.
Are lenders losing money from these deals?
We cannot articulately say that the lenders lose money during lot and land loan deals, but there are higher chances that the deal may not be favorable if the borrower defaults. We can attribute the reluctance of lenders to provide this loan to the previous negative experiences they have had in similar deals. In addition, the unpredictable nature of the real estate market regarding the value of land can put the lender at a disadvantage if the land’s value drops after a customer has failed to comply with the agreement.
Now let’s make a little comparison with the loans provided for the purchase of existing homes. After purchase, the new homeowners take possession of the house and start getting value. These customers will be more focused on meeting their payment schedules to avoid losing their homes in foreclosure. In the case of a land purchase, there is a lower motivation to meet the scheduled payments because the value is only attainable after completing the home. The lenders can end up with just a parcel of land if the customer defaults.
The categorization of lot and land loans as nonconforming loans is also a reason the lenders have ‘steered’ away from providing these loans easily. The nonconforming loans are not bound by the standard national processes used to provide mortgage loans which include a standard set of requirements and specific value that is provided as a loan. The nonconforming loans are used in cases such as the purchase of bare lands for intended home construction. In the case of a default, lenders will find it difficult to liquidate the land since it may not be a lucrative deal for other lending companies in the loan market.
How do the lenders want to do business?
Banks and other loan providers make more money when a deal is started and successfully ended according to the terms and conditions which usually are in favor of the lenders. This is how they want to do business; lenders avoid deals that may potentially end in foreclosure because the chances of making profits are slimmer and it will take a longer and more difficult process to recoup the capital by selling properties. Banks and other lenders are happy when the deal goes ‘smoothly.’ Now you can understand why lot and land loans are not really a favorite investment choice for many lenders.
The need to make more profits
While there are risks in providing lot and land loans, these deals can end as excellent business opportunities for the lenders. It is likely that customers who secure lot and land loans from a lender will return to request another loan to fund the construction and completion of the project. This means more profits for the lenders. The loan market is highly competitive, and there is an ‘unending race’ to get more customers to stay ahead of the competition. This is why you can find lenders willing to provide lot and land loans if you can meet their requirements and in some cases, certain exceptions can be made regarding the lender’s requirements.
In conclusion, don’t abandon your plans to build a new dream home. Now you know why lenders tend to avoid providing lot and land loans. Find out the requirements, and if you can meet them, the funding you need for your project will be provided.