The real estate industry can be incredibly lucrative for entrepreneurs, but the development process can be costly. This is where the search for capital comes in, such as loans for real estate development. Finding lenders who offer a good loan program, a large loan amount, and sometimes a smaller down payment can be your solution. So whether you are interested in commercial real estate, land development or any other development project, this article will detail the financing options available to you.
What is a home loan?
Small business owners will rely on property development loans to purchase land on which they will build in the future or to demolish an existing building to build a new one. Real estate development loans are much-needed capital given to borrowers who need money to build, start a project and hold the finished product until the rental stage.
Types of loans for real estate development
The most popular types of home loans include:
Acquisition loans are used to finance the purchase of undeveloped land. Unlike other financing options, these are strictly funds for the purchase of the property and do not include financing for any renovations or repairs that may be required.
You can use them for:
- Single-family homes
- Condominium conversions
- Commercial properties
- Multifamily properties
- Land ready to use
- Mixed-use properties
These types of loans are used to make necessary improvements, including running water pipes, grading, or whatever is needed to turn a piece of land into a building site.
Acquisition and development loans
Commonly known as A&D loans, these loans use part of the proceeds to purchase the property. Typically, part of the loan is used to buy the undeveloped land, while the rest is used for improvements. These improvements may include grading, installing sewer lines, subdividing lots and building roads.
A construction loan is a short-term loan that covers the cost of building a custom home. It falls under the category of specialized financing also known as “self-construction loans”. The builder usually takes out a construction loan to cover the costs of the project. These often come with higher eligibility requirements and interest rates than traditional mortgages.
The best development loan options
SBA CDC 504 Home Loans (US Small Business Administration): These are longer term loans (10-20 years) and are highly sought after for commercial real estate. They are designed to stimulate the economic development of capital assets that can acquire, modernize or expand a business, as well as to refinance the costs associated with such expansion.
The SBA 7(a) loan for real estate: This is a popular loan option for small business owners looking to finance construction, renovations, upgrades or long-term equipment purchases.
Conventional Bank Loan: Commercial lenders including JPMorgan Chase, Bank of America and US Bank offer commercial loans to qualified borrowers. Loan requirements, restrictions and rates for commercial real estate loans often vary depending on the lender.
Microcredits: Microloans are small loans often given by non-profit organizations (such as Community Development Financial Institutions (CDFIs) and other lending institutions with the aim of helping underserved entrepreneurs gain access to capital.
Loans from private lenders: These loans can come from anyone who has access to the necessary capital and is willing to invest it in your business. A specific institution does not support private lenders and they are not licensed to lend money. The terms of private lenders are generally easier to meet and the length of time they lend will be much shorter as they seek to make a quick profit from their investment.
How to qualify for a real estate development loan
Home loans can have different qualifications depending on whether you are seeking financing from financial institutions or private lenders. These differences include the type of business structure you have, such as a nonprofit, sole proprietorship, C-corp, etc. However, here are some standard qualifiers for property development loans:
- Your business and/or personal credit score.
- Cash flow and any capital invested in your business.
- The appraised value of the property used to secure the financing to determine its current market value.
- A successful track record in business and development, which is used to predict whether you and your business can repay the loan, as well as the expected use of a loan.
Building business credit can be as vital as your personal credit, which is why Nav provides resources to help you start the process and track its progress.
How to Apply for a Development Loan
It is important to have an overview of what is required to receive a property development loan. The application process for each lender varies, but here are some of the general requirements you should know before proceeding:
1. Details about your business:
- The start date of your business.
- Your business address and telephone number.
- Your Employer Identification Number (EIN). If you are an unincorporated business (sole proprietorship), you can use your social security number or tax identification number (TIN).
- Identification. If you don’t have a prior relationship with the lender, you’ll likely need to give them a driver’s license or passport to verify your identity.
2. Do a credit check. Not all financing offers will involve a personal credit check, but many will. Often a personal credit check is a “soft” request that does not affect your personal credit score. Some lenders will also check the company’s credit score.
3. Check your business income. This may include copies of recent bank statements or business tax returns with up-to-date financial statements. Some online lenders will ask you to link your business bank account so they can analyze your business earnings electronically and determine if you meet their requirements.
4. You may also need to go through an appraisal process, especially if you are applying for a home development loan through a federally regulated financial institution.
What to look for in a property development loan
Consider all the factors of the loan you’re considering — from repayment terms to fees to loan type — before you apply. The best loan for you:
- Adapts to your needs
- Gives you enough funding
- Is financially manageable for your small business
Before entering into a contract, make sure you understand the fine print and the total cost over the life of the loan.
Also consider the right repayment term for your business. A loan with a lump sum payment may offer lower monthly payments, but it can cause problems later if you can’t make the final payment and can’t refinance the debt.
Nav offers small businesses an assortment of commercial loan, small business loan and commercial bridging loan products through its extensive marketplace. There, you can be matched with the best possible home development loan options based on the information you provide.
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