How to Use Land As Equity for a Construction Loan

If you want to build a new home, your first step will be to obtain a construction loan from a local bank that has a history of providing construction loans in the area. Construction lenders normally require the borrower to make a down payment of 30 percent of the loan amount. In some cases, 20 percent will be acceptable. If you own the land where the house will be built, you can use it as equity to secure the loan in lieu of a cash down payment.

After approving your architect's plans, select an experienced builder who has a good reputation in home construction. Assemble your financial and employment information and documents that prove your ownership of the land where the house will be built. Prepare a personal financial statement (balance sheet and income data). Assemble your last three years' tax returns and W-2 forms or other employment information for the same period. Have the property appraised by a recognized professional.

Before you meet with a lender, ensure that your property is eligible to secure a construction loan. There should be no encumbrances such as liens in effect. The best way to be sure your land is free from any such problem is to search in your town's registry of deeds for any old liens that may still be attached. If any are present, have your attorney take steps to correct the record.

If you purchased the land within the last 12 months, the construction lender might use the amount you paid to calculate the down payment instead of the appraised value. It would be proper to inquire about this at the earliest opportunity.

When your preparations are complete, it will be time to talk with a lender. The best lender for your purposes will likely be one that is active in real estate finance in your community. Meet with a banker and start the application process. The potential lender will be evaluating you as a borrower and will want to be satisfied that the builder you have chosen and the architect are well-qualified.

The bank will either accept the appraisal you have or will order another. When your construction loan is approved, the bank will advance funds to the builder as he reaches predetermined stages of completion. The lender will inspect the construction throughout the process.

When construction is complete and all inspections have been carried out, it will be time to convert the construction loan to permanent, or long-term, financing. Your construction lender may also provide the long-term mortgage loan. Alternatively, you may wish to shop for permanent financing via a mortgage broker.