LIMITED GUARANTY

Exhibit 10.1

LIMITED GUARANTY

     This Limited Guaranty (this “ Guaranty ”) dated as of the 1st day of September, 2006 (the “ Effective Date ”), is made by United Development Funding III, L.P., a Delaware limited partnership (“ Guarantor ”), for the benefit of United Mortgage Trust, a real estate investment trust organized under the laws of the state of Maryland (the “ Lender ”) or its permitted successors and assigns.

R E C I T A L S:

     A.      United Development Funding, L.P., a Nevada limited partnership (“ Debtor ”) has issued to Lender, that certain Second Amended and Restated Secured Line of Credit Promissory Note in the principal amount of U.S. $45,000,000.00 dated June 20, 2006 (the “ Note ”).

     B.     Guarantor is in the business of providing credit enhancements in the form of loan guarantees , and Guarantor is willing to enter into this Guaranty in favor of Lender and hereby agree to be bound by its terms and conditions.

A G R E E M E N T:

     NOW, THEREFORE, for good and valuable consideration, and intending to be legally bound hereby, Guarantor agrees and covenants as follows:

     1.      Definitions . Capitalized terms not defined in this Guaranty shall have the respective meanings given to such terms in the Note.

     2.      Guaranty and Surety . Subject to the provisions of Section 3 , Guarantor hereby absolutely and unconditionally guarantees and becomes surety for, the full, timely and complete payment when due, whether by lapse of time, by acceleration of payment, or otherwise, of the indebtedness, liabilities and obligations of Debtor to the Lender existing or arising now or in the future under the Note and all renewals, extensions, modifications and substitutions of all or any part of the Note (collectively, the “ Guaranteed Obligations ”). Guarantor’s obligation under this Guaranty is unconditional, absolute and enforceable, irrespective of the validity or enforceability of the Guaranteed Obligations in whole or in part or of the Note or any provision thereof, whether recovery against Debtor with respect to the Guaranteed Obligations in whole or in part is prevented by bankruptcy, the operation of law, or otherwise, and any other circumstance that might otherwise cause a legal or equitable discharge or defense of Guarantor.

     3.      Maximum Liability Amount . Notwithstanding anything to the contrary contained in this Guaranty, (a) in no event shall the liability of Guarantor under this Guaranty exceed $30,000,000.00 (the “ Maximum Liability Amount ”), and (b) the Maximum Liability Amount shall be reduced by $1.00 for every $1.00 by which the Total Partners’ Equity of the Debtor exceeds $30,000,000.00, as set forth in the most recent financial statements of the Debtor as determined on the last business day of the month with respect to which such Maximum Liability Amount is determined (in case of such reduction, the reduced amount shall be the “Maximum Liability Amount” referenced herein). Debtor’s “Total Partners’ Equity” shall be the sum of

Partnership Equity and Net Income as determined by the Debtor in accordance with its financial reporting practices.

     4.      Subsequent Acts by Lender . Lender may, in its sole discretion and without notice, take or refrain from taking any action that might otherwise be deemed a legal or equitable release or discharge of Guarantor’s obligations under this Guaranty without either impairing or affecting the liability of Guarantor for the full, timely and complete payment of the Guaranteed Obligations, which actions might include, by way of illustration and not limitation:

     (a)     the renewal or extension of any of the Guaranteed Obligations or any payments thereunder, or the acceleration or change of time for payment of the Guaranteed Obligations, any increase in the principal amount of any promissory note or other instrument comprising a part of the Guaranteed Obligations and/or any additional funds advanced under the Guaranteed Obligations;

     (b)      the modification, amendment or change in any of the terms relating to any promissory note or other agreement, document or instrument executed at any time in the past, present or future in favor of Lender, including, without limitation, the Note;

     (c)      the absence of any attempt to collect the Guaranteed Obligations from Debtor or any other person or entity primarily or secondarily liable for the Guaranteed Obligations or any other action to enforce Lender’ rights with respect to the Guaranteed Obligations;

     (d)      the waiver, consent, or delay in enforcement by Lender with respect to any provision of any instrument evidencing the Guaranteed Obligations;

     (e)      any failure by Lender to take any steps to perfect and maintain its security interest in, or to preserve its rights to, any security or collateral given for the Guaranteed Obligations, or the release or compromise of any lien or security held by Lender as security for the Guaranteed Obligations;

     (f)      the compounding, rearrangement or consolidation by Lender of all or any part of the Guaranteed Obligations;

     (g)      the release from liability of Debtor or any other guarantor or person or entity primarily or secondary liable for the Guaranteed Obligations who may guarantee or provide security for the Guaranteed Obligations in whole or in part; or

     (h)     the settlement, release, compromise or cancellation of all or any part of the Guaranteed Obligations, or the acceptance of partial payment of all or any part of the Guaranteed Obligations.

     5.      Expenses . Subject to the provisions of Section 3 , Guarantor agrees to pay all costs and expenses, including, without limitation, all court costs and reasonable attorneys’ fees

paid or incurred by Lender in endeavoring to collect all or any part of the Guaranteed Obligations, or in enforcing or pursuing its remedies with respect to the Guaranteed Obligations.

     6.      Payment by Guarantor . In the event of any failure to pay with respect to the Guaranteed Obligations or any “default” or “event of default” under the Note, subject to the provisions of Section 3 , Guarantor agrees to pay on demand, all of the Guaranteed Obligations and all other costs, expenses and other amounts payable under this Guaranty. Lender shall not be required to liquidate any lien or any other form of security, instrument, or note held by Lender prior to making such demand. THIS IS A GUARANTY OF PAYMENT AND NOT OF COLLECTION, and Guarantor specifically agrees that Lender shall not be required to assert any claim, file suit, or proceed to obtain a judgment against Debtor or any other guarantor, endorser or surety for the Guaranteed Obligations, or make any effort at collection of the Guaranteed Obligations, or foreclose against or seek to realize upon any security or collateral now or hereafter existing for the Guaranteed Obligations, or exercise or assert any other right or remedy to which Lender is or may be entitled in connection with the Guaranteed Obligations, before or as a condition of enforcing the liability of Guarantor under this Guaranty or requiring payment of the Guaranteed Obligations under this Guaranty. Guarantor agrees, to the full extent it may legally do so, that suit may be brought against Guarantor with or without making