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Can You Use Land as Down Payment On Construction Loan?

Can you use land as the down payment on a construction loan? We bought a plot of land with cash and want to know if it can be used as a down payment when we apply for a construction loan to build a home.

Michael Jensen, Mortgage and Finance Guru
, Mortgage and Finance Guru

The down payment required for a construction or construction-to-permanent (C2P) loan varies but is usually 10% to 20%. The good news is that the value of the land can be used for all or part of the down payment. For example, if you buy a plot of land for $20,000 in cash and want to build a home with a construction cost of $80,000, you need a construction or C2P loan for $80,000. If the post-construction value of the home is $100,000 and your loan is for $80,000, that means your equity, which is the same as your down payment, is $20,000 or 20% of the property value. So in this example, you meet the 20% down payment requirement. If the post-construction value of the property is even higher, say $110,000, then your equity / down payment is also higher at $30,000 or 27% of the property value. In both of these examples, the value of the land provides the required 20% down payment.

The only time you run into an issue when using the cost of land as the down payment on a construction loan is if the value of the land is low relative to the construction cost to build the home. For example, let's say you purchased a plot of land for $5,000 cash and want a $95,000 construction or C2P loan to build a home. If the post-construction value of the home is $100,000, then you only have $5,000 of equity in the property which equates to a 5% down payment. In this scenario the lender may require that you contribute more funds to meet the down payment requirement.

So in short, while land value can provide the down payment for a construction or C2P loan, the answer to your question depends on your specific situation including the value of the land, the construction cost and loan amount as well as the post-construction appraised value of the property.

One other point we should highlight is that we recommend that you obtain a C2P loan rather than a straight construction loan. A construction loan is a short term mortgage that is replaced with a new, permanent mortgage after the home is built and you are ready to move in. A C2P mortgage is one loan that includes both the short-term construction loan as well as the permanent take-out loan that is put in place when the construction is complete. By using a single mortgage program for both the construction and take-out loans, a C2P loan can save you time and money. We provide comprehensive overviews of both C2P and construction loans on FREEandCLEAR.

I recommend that you contact local lenders to inquire about construction and C2P mortgage programs. You can review lenders in your area by clicking MORTGAGE RATES. We advise you to contact at least four lenders as program availability and qualification guidelines vary. Plus, shopping lenders is the best way to save money on your mortgage.

You can also use our FREEandCLEAR Lender Directory to search for lenders by loan product. For example, you can search for lenders in your state that offer offer C2P / construction loans.

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About the author

Michael Jensen, Mortgage and Finance Guru

Michael is the co-founder of FREEandCLEAR. Michael possesses extensive knowledge about mortgages and finance and has been writing about mortgages for nearly a decade. His work has been featured in leading national and industry publications. More about Michael

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