Horizontal development loans fund the critical first phase of any land development project, covering grading, roads, utilities, drainage, and lot subdivision before vertical construction begins. Borrowers who understand what lenders look for, and who assemble a complete loan package before submitting, can cut approval timelines from months to weeks. This guide walks through every step of the process so you can secure financing faster and start moving dirt sooner.
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What Do Horizontal Development Loans Actually Fund?
Horizontal development loans cover the infrastructure work that transforms raw land into buildable lots. This includes mass grading and earthwork, road construction, utility installation (water, sewer, electric, gas, telecom), stormwater management systems, and the legal process of lot subdivision. Unlike vertical construction loans that finance buildings, horizontal loans finance everything beneath and around the structures.
Most lenders structure these loans as short-term facilities with a 12-to-24-month draw period. The borrower requests funds in stages as each phase of site work reaches completion, and an independent inspector verifies progress before the lender releases the next draw. Because there is no standing structure to serve as collateral during development, lenders view horizontal loans as higher risk than vertical construction financing.
The budget breakdown matters to lenders. They want to see that land acquisition does not consume an outsized share of total project costs. A healthy split keeps land at 30 to 40 percent of the budget, with the remaining 60 to 70 percent allocated to actual infrastructure improvements. If too much capital goes toward land and not enough toward improvements, lenders may question whether the developer can finish the project within the loan term.
How Do Horizontal Loans Differ from Vertical Construction Loans?
The biggest differences come down to risk profile, leverage, and collateral. Horizontal development creates infrastructure that has limited standalone value if the project stalls. A half-graded site with partially installed utilities is difficult to sell or repurpose. By contrast, a partially completed building still has measurable value as a structure.
This risk gap explains why horizontal construction financing typically offers lower loan-to-cost ratios (50 to 65 percent) compared to vertical loans (70 to 85 percent). Lenders also require full personal recourse on most horizontal deals, meaning the borrower's personal assets back the loan.
Developers working on projects that include both phases should consider negotiating a combined horizontal and vertical facility with a single lender. This approach simplifies the capital stack, avoids the cost of two separate closings, and gives the lender comfort that the project has a clear path to completed, revenue-generating assets.
Use our bridge loan calculator to estimate carrying costs during the development period.
What Does the Typical Loan Structure Look Like?
Most horizontal development loans share several structural features. The loan-to-cost ratio ranges from 50 to 65 percent, meaning the developer must contribute 35 to 50 percent of total project costs as equity. Interest rates in 2026 typically fall between 9.5 and 13 percent depending on the lender type, borrower experience, and project complexity.
Terms run 12 to 24 months, with extensions available for 6 to 12 additional months at a fee (usually 0.50 to 1.00 percent of the outstanding balance). Interest is calculated on an interest-only basis, charged only on drawn funds rather than the full commitment amount. This structure keeps carrying costs low in the early months when only a portion of the loan has been funded.
Lot release provisions are a defining feature of horizontal loans. As finished lots are sold to builders or end users, the lender releases its lien on individual lots in exchange for a predetermined paydown amount. The release price is typically set at 110 to 125 percent of the allocated per-lot loan balance, ensuring the lender recovers its exposure plus a margin as lots sell.
Draw schedules follow a predictable pattern tied to construction milestones. Each draw request requires a completed draw request form, contractor invoices, lien waivers from all subcontractors, and an inspection report from the lender's third-party inspector. Keeping organized records from day one prevents delays during the draw process.
What Are the Approval Requirements for Horizontal Development Loans?
Lenders evaluate four primary areas when underwriting horizontal development loans: the borrower's track record, the project's feasibility, the market's ability to absorb finished lots, and the strength of the exit strategy.
Borrower qualifications carry significant weight. Most lenders want to see that the developer has completed at least two or three similar projects successfully. Net worth should equal or exceed the loan amount, and liquid reserves should cover 10 to 20 percent of the loan balance. Developers without a track record may still qualify by partnering with an experienced co-developer or by providing additional collateral.
Project feasibility centers on entitlements and engineering. Lenders strongly prefer projects where zoning approvals, plat recordings, and utility commitments are already secured. A project that still needs a zoning change or variance adds months of uncertainty and gives most lenders reason to pass. Securing all entitlements before approaching lenders is one of the single most effective ways to speed up the approval process.
Market absorption is the third pillar. Lenders review comparable lot sales in the submarket, pending builder activity, and population growth trends. Pre-sales or letters of intent from builders can dramatically strengthen the application. Some lenders require 30 to 50 percent of lots to be pre-sold before they will fund the loan.
How Can You Speed Up the Approval Process?
The fastest path to approval starts well before you contact a lender. Developers who close in under 30 days almost always share the same preparation habits.
First, assemble your complete documentation package before submitting to any lender. Incomplete applications are the number one cause of delays. Every missing document triggers a back-and-forth cycle that adds days or weeks to the timeline.
Second, submit to multiple lenders simultaneously. Sending your package to two or three lenders at the same time creates competitive pressure and gives you backup options if one lender's process stalls. This does not mean shotgunning your deal to every lender in the market. Target lenders whose lending criteria align with your project size, location, and asset type.
Third, order your appraisal and environmental reports before you have a lender. These reports often take three to four weeks to complete, and most lenders will not begin underwriting until they are in hand. By having a recent Phase I environmental assessment and appraisal ready at submission, you can shave weeks off the process.
Fourth, maintain a clear and organized draw budget. Lenders want to see a line-item cost breakdown with contractor bids (not estimates) and a realistic construction schedule. The more detailed and professional your budget, the less time the lender spends asking clarifying questions.
Contact Clearhouse Lending to discuss your project timeline and get matched with lenders who can close on your schedule.
What Is the Step-by-Step Approval Timeline?
Understanding the approval timeline helps you plan your project schedule and set realistic expectations with partners and contractors.
The pre-application phase (weeks one through two) is where most of the heavy lifting happens. During this window, you finalize engineering plans, confirm all entitlements are current, collect contractor bids, and compile your financial documentation. Developers who treat this phase casually end up with a drawn-out approval process.
Lender submission happens in week three. Submit your complete package along with a brief executive summary that highlights the project's strengths: location, absorption data, borrower experience, and exit strategy. Make it easy for the loan officer to champion your deal internally.
Due diligence runs from weeks three through five and overlaps with lender review. The lender orders (or reviews your pre-ordered) appraisal, environmental report, and title work. They also verify your financial statements and review the site plans with their internal engineering team or a third-party consultant.
Underwriting and credit committee review occur during weeks four through six. The loan officer presents your deal to the credit committee with a recommendation. Having a clean, well-documented package reduces the number of committee questions and conditions.
Closing happens in weeks five through seven. Once approved, the lender issues a commitment letter, you review and negotiate final terms, and the closing attorney prepares loan documents. At closing, the lender funds the initial draw (typically for land acquisition and mobilization costs).
Which Lenders Offer Horizontal Development Loans?
Not every commercial lender will finance horizontal development. The higher risk profile means this product is concentrated among a smaller group of specialized lenders.
Community banks are the traditional go-to for horizontal development in their local markets. They understand the submarket, often have relationships with local builders, and can make credit decisions without sending the file to a distant committee. The tradeoff is that they typically require the borrower to maintain deposit relationships and may have lower lending limits.
Regional banks serve mid-size to large developments and can handle bigger loan amounts than community banks. Their underwriting standards tend to be more formal, and the approval process takes longer, but their pricing is competitive.
Private lenders and hard money shops fill the speed gap. When you need to close on land in 10 to 21 days to secure a deal, private capital is often the only realistic option. Rates are higher (11 to 14 percent), but the speed and flexibility can justify the premium. Many developers use a bridge loan from a private lender to acquire the land, then refinance into a lower-rate bank facility for the development phase.
Land funds are specialized investment vehicles that focus exclusively on land and horizontal development. They offer competitive terms for large-scale projects (100+ lots) and are comfortable with complex entitlement situations that banks may shy away from.
What Are the Most Common Delays and How Do You Avoid Them?
Knowing where deals get stuck lets you plan around potential bottlenecks.
Entitlement gaps are the most frequent cause of delays. Lenders will not proceed if zoning, plat approval, or utility commitments are conditional, expired, or missing. The fix is straightforward: finalize all entitlements before approaching lenders. If your project requires a zoning change, complete that process first.
Environmental issues, particularly unexpected findings in a Phase I or Phase II assessment, can halt a deal entirely. Order your Phase I early and address any recognized environmental conditions before submitting to a lender. If a Phase II is recommended, budget the time and cost into your pre-application phase.
Appraisal disputes arise when the lender's appraiser values finished lots lower than the developer's projections. To mitigate this risk, provide the appraiser with strong comparable lot sales data from your submarket. Meet with the appraiser on-site and walk through your development plan so they understand the project's context.
Insufficient liquidity is a deal-killer that surprises many developers. Lenders expect you to have 10 to 20 percent of the loan amount in liquid reserves after closing, separate from your equity contribution. If your balance sheet is heavy on illiquid assets (other real estate, business equity), consider bringing in a capital partner or securing a line of credit to demonstrate liquidity.
Title and survey problems, including boundary disputes, easement conflicts, or unresolved liens, add weeks of legal work. Order your survey and title search early, and resolve any issues before they become lender conditions.
For a deeper dive into structuring debt across both phases of development, read our guide on horizontal vs. vertical construction loans.
What Exit Strategies Do Lenders Want to See?
Every horizontal development loan application must include a credible exit strategy. Lenders want to know exactly how and when they will be repaid.
Selling finished lots to homebuilders is the most common exit. In markets with strong builder demand, developers can pre-sell 30 to 50 percent of lots before breaking ground, giving the lender confidence in repayment. The lot release mechanism ensures orderly principal paydown as each lot sells.
Transitioning to vertical construction is the second path. Here, the developer retains the finished lots and builds homes or commercial buildings. This exit requires a new vertical construction loan or a combined facility. The advantage is higher profit potential; the risk is a longer timeline and additional capital requirements.
Refinancing into a land banking line works for phased communities where lot sales happen over multiple years. Once horizontal improvements are complete, the developer refinances the development loan into a lower-rate land line, reducing carrying costs while selling lots at a measured pace.
Lenders view the first exit (lot sales) as the lowest risk because it generates cash quickly. However, they will accept the other strategies if the developer can demonstrate market demand, sufficient capital, and a realistic timeline.
If you are building from scratch and considering USDA financing for portions of your project, review our guide on USDA construction loans for additional program details.
What Does Lot Pricing and Regional Cost Variation Look Like?
Finished lot costs vary dramatically by region, and understanding your local market's cost structure is essential for accurate budgeting and lender negotiations.
These regional differences affect both the total loan amount and the per-lot economics. In the Southeast and Midwest, lower land and labor costs mean developers can deliver finished lots at price points attractive to production builders. In coastal and mountain markets, higher costs require premium lot pricing, which limits the buyer pool to custom and semi-custom builders.
Lenders evaluate per-lot economics closely. They want to see that the finished lot price covers the allocated development cost plus a reasonable profit margin (typically 15 to 25 percent). If your projected lot prices do not support this margin, the lender may question the project's viability.
Contact our team to discuss lot-level underwriting for your specific market and project.
How Should You Structure Your Loan Application for Maximum Speed?
Putting together a compelling loan package is both an art and a science. The goal is to make it as easy as possible for the lender to say yes.
Start with a one-page executive summary that covers the project overview (location, lot count, target buyer), borrower resume (relevant projects completed), sources and uses of funds, exit strategy, and a timeline. This gives the loan officer a quick framework before diving into the details.
Follow the executive summary with your full documentation package organized in a logical order. Use the checklist below as your guide.
Include a market analysis section with recent comparable lot sales, builder activity in your submarket, population and employment growth data, and school district ratings (for residential subdivisions). The stronger your market story, the more comfortable the lender feels with absorption projections.
Finally, present your draw schedule alongside the construction timeline. Map each draw to a specific milestone, and include the inspection criteria that must be met before funds are released. This level of detail signals to the lender that you have planned the project thoroughly and reduces questions during underwriting.
Frequently Asked Questions
What credit score do you need for a horizontal development loan?
Most bank lenders require a minimum credit score of 680, though 700 or higher improves your chances of competitive pricing. Private lenders and land funds are more flexible, sometimes working with scores as low as 620 if the borrower has strong development experience and substantial equity in the deal. Your credit score is one factor among many; lenders weigh net worth, liquidity, and track record equally or more heavily.
Can you get a horizontal development loan with no experience?
It is possible but difficult. Most lenders require the borrower to have completed at least two or three similar projects. If you lack experience, consider partnering with an experienced developer as a co-guarantor or joint venture partner. Some lenders will also accept relevant adjacent experience, such as general contracting or civil engineering, combined with a strong advisory team.
How much equity do you need for a horizontal development loan?
Expect to contribute 35 to 50 percent of total project costs as equity. This includes land value (if you already own the site), cash equity, and any infrastructure work completed before the loan closes. Some lenders will credit "sweat equity" from entitlement work, but most prefer hard dollars or appraised land value.
What happens if lots do not sell as fast as projected?
Most horizontal development loans include an extension option (6 to 12 months) for a fee of 0.50 to 1.00 percent of the outstanding balance. If absorption is slower than expected, you can exercise the extension to avoid a maturity default. Alternatively, you can refinance into a land banking line at a lower rate while continuing to market lots. Building a conservative absorption timeline into your original projections helps avoid this scenario.
Are horizontal development loans recourse or non-recourse?
The vast majority of horizontal development loans require full personal recourse, meaning the borrower personally guarantees repayment. This reflects the higher risk profile of land development compared to stabilized commercial real estate. Some larger deals with well-capitalized sponsors may negotiate partial recourse or recourse burn-down provisions that reduce personal exposure as lots sell and the loan pays down.