Can I use my land as down payment for a construction loan?
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- Опубліковано 2 сер 2023
- If you want to get a construction loan but you already own the land, can you use it as equity or a down payment?
In this video, I dive into the topic of construction loans and explore the possibility of using your land as a down payment. I address various scenarios, including owning the land for less than a year and owning it for over a year, highlighting the differences in loan calculations.
Construction loans differ from traditional loans, operating on a "loan to cost" or "loan to value" basis. I illustrate these concepts with real-world examples, discussing the implications of land value and cost on loan eligibility. If you're considering a construction loan and want to leverage your land, this video is a must-watch.
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Finally, Construction Loans explained for the lay person!! Well done!!
Thanks so much. Good luck!
Chris knows his stuff! Expert level. He’s helped me understand what to look out for and how to best handle my complex situation. Thanks Chris!
Thanks so much Steve. Blessings on your project. Expecting you to pick me up at the Creede helipad and take me skiing. :)
Great video Chris. Keep being awesome!
Thanks Dan!
Awesome info and thank you very much
Very welcome
Thank you for this video! We purchased property in 2020 and we are trying to figure out what we need to bring to the table in order to get our mortgage to fall within our comfort zone. I have a lot to learn!
Thank you Emily!
This is exactly what I'm in the process of doing but didn't know I had to own the land for over a year first. Thanks for the great info 😊
To be clear, no one will require you to have owned the land for a year to use it as part of the equity in the deal (i.e, "use it as a down payment"). You just have to have owned it for a year to get credit for any appreciation in land value since you bought it. 'So, if you paid 100k for land and it is now legitimately worth 130k but you bought it 9 months ago, they will only give you value of 100k for purposes of their loan to value / loan to cost calculation.
@MortgageMasteryTheater thanks for the explanation. I'm buying land now and plan to build in 2yrs. Maybe the value will be higher in the future.
good detailed explanation on construction loans.
Glad it was helpful!
Very helpful video. We purchased 22 acres 2+ years ago and working through some of this now. thank you
You bet!
By the way, you are my 666th subscriber. Should've brought a friend! :)
@@MortgageMasteryTheater yikes! Lucky me 😂 thanks for replying to my email also. Looks like you are at 667 now, let’s get you to 777 Pronto
@@vinnyjr79 Indeed!
Very helpful.
Thanks Adam!
Hi, was wondering if you have an excel spreadsheet available for the examples you gave and if so, a link to use? Thanks for the video and advice.
Can you discuss the payments on a construction loan. For example what do monthly payments look like on draws etc for say a loan for $400,000
Thank you for the video. My questions is what are the differences to you scenario in the video with land being gifted (rural farm land) via a quit claim deed? If I receive the land after surveyed and registered, possess it for greater than a year. How does this effect the down payment? Thanks and appreciate your videos.
Hi Jonathan. You should verify anything I say with your actual lender as construction loan guidelines are not as uniform as general fannie / freddie guidelines. That said, most lenders will attribute the donor's ownership period to you and value the land at the appraised value of the land in your loan to cost calculation. In your case, you have owned it more than a year since to either way, you get the fmv of the land included in your cost basis.
Great video. I have been looking for this for a long time.
Quick question, if I already own the land that was part of a house purchased for more than one year, how would the land value be calculated. Secondly, if the house has equity, how would the equity be assessed on the land part of the house for the purposes of getting a construction loan?
Thank you
Sounds like maybe you subdivided and created a buildable lot? If so, did the mortgage lien attached to both resulting lots (the one with the house and the one without?). If you have owned the land for more than a year, then the "cost" of the land for loan to cost calculation purposes is the current appraised value (determined by the construction loan appraisal). If the properties are subdivided, then the lot with the house probably won't be included in the loan (i.e, won't be used as security for the construction loan). Feel free to call to chat about this further. 206-999-6941. PDT.
We have owned 5 acres in Colorado for over a year. Paid 25K in 2021, it has appreciated. In an effort to keep the final loan down we have put in septic 25K and dug the well ( no pump yet, waiting for construction) 16K and drive 6K. When they value the land will they look at everything we have done and value this at a minimum, dollar for dollar ( no land appreciation) for 72K? Possibly more with land appreciation?
Hi. Since you have owned the property for over a year, the "cost" of land will be its market value as determined by the appraiser excluding (I think) the improvements. This market value will be added to the other past and proposed costs of the project (well, septic, drive, plus all the future soft and hard costs of construction to determine a "cost" for their lower cost or fair market value calculation. So, say land is valued at 75K, cost to build hard and soft is estimated at 400k. Your "cost" will be 475K. If the construction appraisal (based on plans, specs, location, materials, etc) comes in higher than 475K, you will be limited to 475k for loan to value calcualtions. If it comes in lower than 475k, you will limited to the lower amount.
Hi! In your example, if you owned the land free and clear, would you still take the $50k off the max loan amount before you get to the available amount for construction or would that be $0 owed on land leaving only 60k cash due to close??
Hi Mandy. It would be the latter. Assuming the borrower qualified for a 440K loan amount, that would be fully available to cover all hard and soft costs of the project and would not be diminished by the cost of the land. It would only be diminished if there were liens against the land (or recorded judgments against the borower) that needed to be cleared before closing.
Suggest that you simplify the example. Try using $400,000 new build, with $100,000 land owned free and clear by home owner. ($400k build cost + $100k land credit). Therefore, $100,000 / $500,000 = 20% down payment credit based on land equity. New homeowner then finances a $400,000 mortgage. Simple!
This is what I was looking for!! There isn’t any debt owed on my land. If my dad is gifting me the land would that mean I would own it for less than a year even if he’s had it for way longer?
@@user-wo9nc3eu2s
As long as you have clear Title to the land that's gifted, and you are financing new construction, nothing will stop you from proceeding! Good luck!
Can I put a down payment without a land as collateral?
I need help! I’m in Georgia, US & my parents have 8 acres that we live on but the local jurisdiction is requiring us to split the lot into 2 and then if we want to recombine the lots we would have to demolish the primary. I want to build a new more modern, energy efficient home to last for my generation and my kids. I would build a multi generational home similar to the one we have right now but it’s not built well and I have knowledge in construction/building. How would that work with the small remaining Mortgage on the home left to be paid ? But the home & land currently are valued at similar numbers in this video ?
Hi. Not sure I am following entirely. But, my sense of it is that you would need to get a lien release from the current lender to split the lots since fannie/freddie lenders generally don't cross-collateralize against more than one property and you would now have two properties. They would likely require the lien to stay with the improved (more valuable) property with the house on it. So, you would have a free and clear lot to build on. You could pay off the small lien with cash available for the construction project and just borrow more on the construction project if you need to pay off the existing lien to qualify for the new loan. That is about as much as I can offer. I would recommend you find a local broker at findamortgagebroker.com for your zip code. Be sure to find one with construction loan experience. Best to you!
Hey Chris, I have a unique situation. I inherited 3 acres that has a lien attached to it from my grandfather a few years back. I'm looking to secure a business construction loan on building a daycare on the lot. Do I have to pay the lien off myself, or could I include the lien into the loan?
Hi Kyle. Sounds like a great project. I am not versed in commercial construction lending but as long as you qualify for enough loan to cover the debt payoff and all the build costs you need, shouldn't be a problem having the loan pay off the lien.
I own a house that’s valued at the same amount of the land, but I still owe $140k on the total mortgage. The house could be torn down and start from scratch, or, we can gut it and add-on with additional foundation support and engineering. Either way, the construction would be approx $400k.
If I gave $120k in overall equity, with $140k balance, is it better to remodel to the existing house, or build new. All of the lots in my neighborhood are going for $120-$150k now.
Hi TT. I am afraid that I won't be much help with that question. The answer will depend in part on whether it is simply a financial comparison or if your personal / family needs / preferences facor in. If the former, look for a good builder and realtor you can trust and get their input. Best of luck. Sounds like a great project.
We have 21 acres with a home already on it where we live. Going to divide the parcel and build on 16 acres. We have a huge amount of equity in the value of our current house. Does that factor in, or do we only get credit for the 16 acres?
Hi Doug. You would generally only get credit for the land securing the construction loan which would be the newly created lot (sans land/improvements related to the separated portion).
Where can you find Construction Loans? From Private or Hard Money lenders? If its coming from a bank, what bank participates in this?
Hi. Depends on your specific needs, resources and credit profile. I would start by going to mortgagematchup.com and finding a good mortgage broker in your local market. Feel free to reach out with additional questions.
Is the prep of land able to be included in construction loans? Like grading, wells, septic, ect able to be included?
Definitely but check with your lender about how to account for any items you pay in advance and hope to get reimbursed for via the construction loan. There are generally very particular documentation requirements.
Hey, how would you setup that in Encompass?
Sorry - I have very little experience with Encompass.
So if the land is paid off over 1 years… and the land is in multiple family names… my house will be the first on the land. Would the lender appraise the whole land or just the acre or two I’m using? Also is it best to try for a construction only loan?
Hi. The land that is considered will be determined by the legal description. If it is all under one legal description, then it will all be considered. If the land is subdivided into separate legal / saleable parcels, then only the parcel your home is built on will be considered. Not clear what you mean by a construction only loan.
Hi Chris, great video. What happens in the event the land was gifted to you? My grandfather left me 2.5 - 3 acres in MA. The land is valued right around $250k. Would this make my land cost $0? My wife and I want to have a modular home built, and we're thinking the build would cost around $500-$550k. We're going to be looking to do a land equity construction loan, and hoping to have nothing due at signing. Appreciate your time in advance - Taylor
Thank you. Typically you get credit for then donor’s holding period which i assume is more than a year. So, land cost would be the fmv for purposes of the loan to cost calculation.
My husband and I recently bought land and are hoping to pay it off in little over a year. Would that qualify us to use our land as downpayment and pay closing costs with equity based on the actual market value?
As long as you own it for a year or more, should give you credit for then current value. Confirm with specific lender.
I bought family land that's been handed down, so I am up big per acre. The thing is I will pass it down also.
If there is a gift component to the transaction, you may get to use the donor/seller's holding period and use the appraised value. Not a given. Check with your lender. Thank you!
Is this a general rule or are there lenders who lend on LTV?
It’s pretty general but don’t let that stop you from explaining your particular situation and asking.
Hi Chris, we owned a land paid cash $100k 2 years ago, now the land is 500k, we want to build a house 500k, how much would be the down payment? Thanks.
Nice. You should not have to put anything down. If you wanted to borrow the full 500k, your loan to "cost" would be 500/1mm or 50%. Unless it appraised lower than 1mm, then your loan to value would be 500/appraised value. Either way, should not need to put money down. Feel free to reach out if you need a recommendation for a good mortgage broker.
@@MortgageMasteryTheater Thank you so much!
If I own a home worth 350k (owe $140k on) in Texas (that I would like to keep and rent out), and if I own acreage free and clear in Arkansas that I would like to build on (worth 25k) could I use that as collateral to build a forever home on with a construction loan?
Hi. Thanks so much for reaching out. Not entirely clear on your question. If you are asking if you can use the equity in Texas to secure your construction loan in Arkansas, I suspect the answer is no. There are some lenders that will "cross-collateralize" a loan against more than one property but these are rare and even these are typically limited to properties within the same county. The equity in your Arkansas land will certainly be considered in the construction loan collateral. I know many lenders who will lend up to 95% of the the total cost of building a new primary. So, if you have 25k in equity in land, and you needed 475k all in for hard and soft costs for the new project imn Arkansas, that would be a total cost of 500k (land plus build) and a max loan of 475K allowing you to bring nothing to the table. Reach out if you need a mortgage broker recommendation in your market that can do this type of loan and blessings on your project!
what if the land was a gift that was purchased by family would the value still be on the upper level
Should be if donor owned it for more than a year but check with specific lenders once you make contact.
Hello. My wife and I purchased land about 3 years ago at 70k and comparable property next to us is selling for 250k plus. The total price of the build is 600k how much down is that and how much mortgage would I actually need to apply for ? Thanks in advance.
Hi Casper. Sounds like a fun project. If I am understanding that you own the land free and clear and need 600k to pay your builder 600k including all soft costs (permits, etc), your cost basis would be 850k (assuming your land estimate is accurate). If you wanted to put zero cash into the deal, borrowing 600k would be a loan to cost of right about 70% (assuming is appraises for at least 850k). Most. construction lenders would do this. If you are in WA or ID, give me a call. Otherwise, go to findamortgagebroker.com and find a great broker. Be sure to get one with construction loan experience.
@@MortgageMasteryTheater thank you for your response. I live in Atlanta though. I will be shopping around this month for a loan.
Great video. Me and my wife recently purchased a 3.5 acre property about a year ago. At the time the seller was asking 95k. We were able to close the deal for 80k but i aquired 5k in equity. We found a builder with a floor plan we like and he's asking roughly 532k to build our dream home. Do you think we could use our land to cover cost of the build?
That depends on a few factors. What is the land worth today? What do you owe on the land? What do you expect the completed house to appraise for?
@MortgageMasteryTheater we had a land loan that we recently paid off a few months ago free and clear. But we do not know how much it could be worth today and how much it would appraise for completed. I was thinking of saving up more especially since these interest rates are through the roof. So when things start to settle down. We can move forward and build with a peace of mind knowing we would be financially prepared
@@kednerfrancois7420 Great job on getting that paid off. Basically, let's say that the land is worth what you paid (80K) and the house adds 532k in value. The appraised value would equal the costs at 612k. If you needed 532k to build plus 10k in closing costs, you would need to borrow 542k. This is about 88,5% of the lower of the cost/value (both 612k in our example). I have construction lenders that would lend you up to 95% of the lower of cost/value so you should be able to do this project without putting any additional cash into the deal.
@@MortgageMasteryTheater Thank you for clarifying it for me. And at the moment I think I would continue to save funds until me and my wife are ready to push forward with the build but I'll keep that in mind.
Is land equity as a down payment compulsory for a construction loan? I have a down payment but the bank insist on using the land equity for down payment. We own and paid off the land free and clear recently for $250,000. We are planning to build a $450,000 house. What would be the soft cost be in NC and how much down payment would be for my scenario? Thanks in advance.
Hi Karen. Land equity for a down payment is compulsory for a construction loan like gravity is compulsory for a fall. The value of the land is automatically included in the total cost of project. If the land's value is 250K (and has been owned by you for a year or more), the total cost would be 450+250+ soft costs (sorry, no idea what those will be). If you wanted to bring zero cash to the deal, you would borrow 450+soft costs (say 30k). or 480. Your loan to value would be 480/700 or 68%. Your "down payment" would be 32%. Most banks should go that high and higher. If you did not want to borrow that much, just lower your loan amount request and bring that cash to the table at closing. Hope this is helpful.
One thing is that, before we paid off our land, the bank suggested we don’t pay it off that we owed 80k. I still don’t understand why. Is there a reason why the bank didn’t encourage us to pay off our land prior to getting a construction loan?
@@KareNEexpert May be just a practical consideration. At the end of day, you are managing how much cash you put into the deal by choosing a loan amount. The bank may just be thinking it is easier for them to verify that the lien is cleared if you let escrow pay if off.
@@MortgageMasteryTheater Thank you for clarifying. I was suspicious at first thinking they didn't want us to pay it off so they could rip us off.
Do all lenders follow that same illustration if you’ve owned the land for 1 years or less and the appraisal value of the land is greater then what you paid? I ask this because I purchased land from my brother for $40k last year, but the value of it is at $70k rn. I’m trying to not put anything down if I don’t have to.
That might work. Was the purchase below market, in other words, was there a partial gift of equity by selling it to you for 40 when it was worth 70 or was there another reason for the big difference? Either way, construction lenders are often not bound by fannie / freddie and may treat it as a partial gift of equity and allow for the higher land value. If not the first one you speak with, try others.
@@MortgageMasteryTheater my brother sold it to me at a low price because of being family.
What if you inherited land that you’ve owned less than a year? So you didn’t pay anything for it. Would it be the appraisal value?
Inherited property typically is credited with the donor’s holding period so as long as your ownership plus the donor’s is a year or more, then yes.
@@MortgageMasteryTheater thanks! Follow up question. Me and my wife want to build a house on her father’s land. He wants to put our name on the deed along with his. He inherited the land decades ago. Do me and my wife’s name have to be on the deed for more than a year?
@@ryane3970 That's probably a question you should ask your lender as it requires an extrapolation of the basic guidelines. Let me know if you need a referral to a lender in your area and I will see what I can do.
Hi Chris, I bought land for $49,000 about 2 years ago. I have no lien on it. Now it is worth around $85, 000. I want to build a home for $350,000. How much would I need to put down?
350/435 is just a hair over 80%. Almost any construction lender can do that. Many can go over 80%. Go to mortgagematchup.com to find a great broker.
@@MortgageMasteryTheater Thank you! I also plan to put down $150K down in cash. I should be in a good position I think. Thank you for the information.
If a fully paid piece of land is handed down, we have to have it in our name for a year to get a better construction loan?
Probably get market value if acquired by gift from donor who held it for a year or more. Check with lender for specifics
@@MortgageMasteryTheater Thank you for responding so quickly. This is my first attempt in trying to figure this out.
Good luck!@@theaveragejoebody
What if you own the land for less than a year and financed it but end up paying off the land prior to construction
HI Rachael. The land would still be valued at actual cost for purposes of the loan to cost calculation since it was owned for less than one year. Not sure this answers your question but feel free to follow up if you have additional questions. You can call me at 206-999-6941 after 8am, pdt if you want to discuss your situation in greater detail.
Hello, what if my land was owned by family for 5 years then gifted to me less than a year ago. Do i still get the appreciation due to it being just transferred to me?
Check with your specific lender but most should give you credit for the donors holding period and therefore giving you full fair market value of the land in your loan to cost calculation.
@@MortgageMasteryTheater Thank you
Another quick question. If I own my land 100%, is it normal for a builder to ask for earnest money down? I thought I wouldn't need to give money down since I own my land
@@fernandogarza661 Most builders are going to require advance deposits. They have to buy materials and invest time to prep for hte project.
@@MortgageMasteryTheater thank you
So if you buy a piece of land for $50k cash and it appraises for twice as much, but own less than a year, the bank won’t used the appraised value as the land value? I’m thinking of a non-arms length type land purchase
Probably worth asking each specific lender about. Sounds like there is a gift component and properties acquired by gift may get to tack on the donor's holding period for determining which value to use in the loan to cost calculation.
Can you get a construction loan if you have already started building? I owe nothing on land, well and building.
Some lenders are queasy about lending when construction has already started due to heightened risk of undetected mechanics and other liens. That said, some will still do it so you just need to ask.You'll have a better chance if you have good records of what was done by whom and proof of payment. Happy to refer a lender if you let me know where you are building. Best to you.
I spoke with one of more experienced construction lenders and they will do this. Let me know where you are building and I will try to find a good broker with access to this lender.
Ridiculous
Great Video!
I paid 225K for a land less than a year ago, building and soft cost is 400K, appraised value came to 525K, bank is lending at 90% LTV, I have 190K debt on the land. I'm calculating 117.5K cash due at closing. Wanted to run by you if the calculation is correct.
Thank you! Sounds right since the appraised value is lower than the cost and would be used. Assumes you have not prepaid for anything. If not too late, you might try findamortgagebroker.com for a lender experienced in construction who is sure to have a product that goes to 95% on an owner occupied loan.