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Can You Use Land as Down Payment On Construction Loan?

Can you use land for 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, that means your equity, which is the same as your down payment, is $20,000 or 20% of the property value, which likely meets the lender's 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 ($110,000 (post-construction home value) - $80,000 (mortgage) = $30,000 (equity)). In both of these examples, the value of the land provides the required down payment for the construction loan and from the lender's perspective, the higher your down payment, the better.

We recommend that you contact multiple lenders in the table below to learn about construction and C2P loan terms and qualification requirements.  Shopping lenders enables you to find the lender and program that best meet your needs.

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Data provided by Informa Research Services. Payments do not include amounts for taxes and insurance premiums. Click for more information on rates and product details.

Please note that depending on when you purchased the land, the condition of the property and other factors, you may be required to obtain an appraisal to determine the value of the land for your down payment.  If you acquired the property several years ago, the value may have changed and lenders want to use the current property value when you apply for the mortgage.    

The only time you run into an issue when using 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. In this scenario, your loan-to-value (LTV) ratio, or the ratio of your mortgage relative to the fair market value of the property, may exceed the lender's limit, which is usually 80% to 90%. 

For example, let's say you purchase 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 and 95% LTV ratio. In this scenario the lender may require that you contribute more funds to meet the 10% to 20% down payment requirement.

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 cost of construction, mortgage amount and the post-construction appraised property value.

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.

Review How Construction-to-Permanent (C2P) Loans Work

Finally, you can use the FREEandCLEAR Lender Directory to search over 3,900 lenders by loan program.  For example, you can find top-rated lenders in your state that offer  C2P and construction loans.

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Current Mortgage Rates as of October 17, 2019
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  • Loan Type
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  • Contact
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Data provided by Informa Research Services. Payments do not include amounts for taxes and insurance premiums. Click for more information on rates and product details.

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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