Using Land As Collateral For Construction Loan

7 Replies

My wife and I recently came across a great deal on a piece of land in a great family town that we would love to build on home on. Long story short the land is not zoned for a home at this time and the seller is giving us a fantastic price. The owner really wants to get rid of the land, but has always balked at the work required to get it zoned and is tired of taking care of it. 

My wife works in real estate development and has had preliminary discussions with the city and we feel the zoning will not be an issue. We have a contract drawn up and have verbally agreed with the seller that the by signing the contract we have the exclusive rights to the land for 1 yr while we work with the city to get the land approved for zoning (we estimate a couple of months on the low end). At any time we can back out if the zoning efforts fail or we decide for some reason we want to back out. 

Our ultimate vision is to get the land zoned, purchase the land and then get a construction loan to build a house on the land. 

This would all be new to us (we already have a mortgage on a rental unit) and we currently rent. But we have 2 young kids and would love a larger home for our boys to grow. 

I have a few questions that I was hoping to get some advice. 

My thought was to purchase the land with cash and to use the land as collateral for a construction loan.    

My wife and I have done quit a bit of research and figure if everything goes close to as planned, conservatively we would have around $60k of equity (land+home) once the finished product is appraised. 

I guess my main question is in regards to using land as collateral for construction loans. I want to go about it using the least amount of money out of pocket as possible. 

Can you take out a loan for land and then use that as collateral? Or do you need to own the land free and clear?

Are there any key points or pieces of information that could be of help to us in this search that you would recommend?

Is there a certain profession or line of professionals that you would recommend seeking for with this kind of project? I feel there are so many options and details involved seeking professional guidance may be the best move for the long run as it could possibly save a decent amount of money and headaches. 

Thanks in advance!

You should talk to several local banks about what their lending criteria are for construction loans but my understanding is that if the land has more than a certain amount of equity at the start the bank will issue draws to pay for the construction along the way so that if the project goes sideways there is still enough equity for them to foreclose and sell without losing money on their end.

@Justin Adkins Ditto to call around. Since you are looking at building as your primary residence (not an investment), you might find a bank willing to loan on appraised value.  Either case, the bank should allow you to use the money spent on the land as full or partial down payment (assuming the land appraises for at or more than your cost).  If you can not find a bank willing to loan on appraised value, you will likely need to come up with a down payment of 20-25% of the total cost of the project.  Your down payment can be offset by the cost of the land, assuming you dont owe money on it.  

I would suggest starting with local banks, and tell them what your trying to do.  Some will have construction loan programs, hopefully one will have a decent program that works with your goals.

When we built our house back in 2005, I purchased the land outright.  We found a local bank that was fairly flexible and they ran their appraisal based on location and the blueprints - basically a $/SF appraisal.  Since the land was paid for and I was only asking for a construction loan at 60% of the appraised value I never had to put any additional funds down.  This was before the crash and rules may have changed, but as others said find a good community bank or two and have a conversation about what you want to do.

Good luck!

Thank you all for the feedback. We are in the process of finishing up the contract as we speak. I would welcome any more tips, help or direction from others. Or those who have had similar experiences. Thanks again!

@Justin Adkins I poked around on something like this, some do give you 50% land and 100% construction cost. So you habe 50% + total soft costs to bear. In most cases, they want at least 25% safety net ot equity, some want more because it is a new build and they are taking chances on you as a developer who doesn't know what he is doing (that's their assumption). I've found a program that does 100% on both but that starts like a hard money then converts to traditional, that was the least amount of money, more cash spent at the end. In your case, you are at an advantage, they will discount your current rent and add it to your loan qualifications.

I have a similar situation that I really need some advice on.  My  husband and I own 68 acres in the country and is planning to build our home on it.  This will be our permanent residence.  The land is owned free and clear.  I was wondering what the risk are for using the land equity as down payment.  We don't want/need a mansion.  Just a normal house.  I expect the land to value around 25,000, the amount we need to borrow will be around 225,000 (without factoring in land equity if we choose to go that route), and I'm guesstimating that the house will appraise for about 200,000.

Our bank told us in the past that they loan 85% of the appraised value of the house that will be constructed.  We have not talked to them or any other banks about the land equity but will within the next couple of weeks.  We also will have 10,000 cash down payment (I know that sounds very meager but it is what it is).

Has anyone gone through this process that can testify first hand what it was like?  Will the land equity down payment act like the cash down payment in lowing the monthly mortgage amount?  Or does it only secure the loan.

Originally posted by @Sylvia King :

I have a similar situation that I really need some advice on.  My  husband and I own 68 acres in the country and is planning to build our home on it.  This will be our permanent residence.  The land is owned free and clear.  I was wondering what the risk are for using the land equity as down payment.  We don't want/need a mansion.  Just a normal house.  I expect the land to value around 25,000, the amount we need to borrow will be around 225,000 (without factoring in land equity if we choose to go that route), and I'm guesstimating that the house will appraise for about 200,000.

Our bank told us in the past that they loan 85% of the appraised value of the house that will be constructed.  We have not talked to them or any other banks about the land equity but will within the next couple of weeks.  We also will have 10,000 cash down payment (I know that sounds very meager but it is what it is).

Has anyone gone through this process that can testify first hand what it was like?  Will the land equity down payment act like the cash down payment in lowing the monthly mortgage amount?  Or does it only secure the loan.

 68 acre worth???? 25,000 ????I don't know  any land going for less than 3k and that is swamp land.....I would get a real price for that land to start with.  I bought land 22 years ago that is in the middle of no where and it was 3k an acre now worth 10 k an acre.  Land is a commodity there is only a finite amount of land on earth and it has value.  

Good Luck!

If you have any other questions please tag me. 

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