Can I Get a Construction Loan If I Already Own Land? A Guide for 2023

If you already own a vacant plot of land you may be wondering if you can leverage this to get approved for a construction loan to build your dream home. The answer is yes – owning land can potentially help you secure financing to build a new house on the property.

However, some specific requirements must be met to use your land as collateral for a construction loan. In this comprehensive guide, I’ll walk through everything you need to know about getting a construction loan when you already own the land, based on the latest expert advice.

How Construction Loans Work When You Own Land

Here’s a quick overview of how construction loan financing works if you already have the land

• You use the land you own as collateral to take out a mortgage just for the cost of construction.

• The lender will require a down payment, often 20-30% of total building costs. Your land equity can count towards this.

• You make interest-only payments during the building phase (usually 6-12 months).

• Once construction is finished, the loan converts to a traditional mortgage with principal + interest payments.

• Your land serves as additional security for the lender in case of default.

Construction loans allow you to finance the building of a new home on land you already own. Let’s explore the specifics of qualification and requirements.

Loan Eligibility and Qualification

To qualify for a construction loan, lenders will evaluate:

• Your credit score and history
• Income and employment
• Existing assets and reserves
• Appraised value of land

You’ll need good credit (640+ minimum score) and stable income to be approved. Provide tax returns, bank statements, and proof of land ownership.

Construction loans are riskier for lenders than mortgages on existing homes. So requirements are stricter compared to buying a finished house.

Down payment requirements are also higher, often 20-30% of total building costs. Your land equity can count towards this down payment amount.

Having substantial assets and equity in the land helps offset the higher risk and boosts your chances of loan approval.

Using Land Equity as Down Payment

If you own land free and clear, without any loans against the property, you can tap into your land equity in two main ways:

1. Take out a separate loan against the land

Borrow against the land value separately from the construction loan. This gives you funds to put towards the down payment.

2. Use the land as collateral for the construction loan

Include the land as security for the same loan that finances the building costs. This allows you to borrow more to cover both land purchase and construction.

Talk to lenders to see whether they’ll let you roll the land into the same construction loan or prefer issuing a separate land loan. Shop around for the most flexible terms.

Either way, the more equity you have, the larger down payment you can make, which improves your loan eligibility.

Types of Construction Loans

Two main types of construction loans are available:

Short-term construction loan – This covers just the building phase. Once the home is done, you get a standard mortgage to pay off the construction loan. There are two separate loans and closings.

All-in-one construction loan – A single loan that bundles the short-term construction financing and long-term mortgage into one. Only one loan and one closing needed.

All-in-one loans have become more popular as they offer more convenience. But a short-term loan may allow you to lock in today’s lower construction rates if you expect mortgage rates to rise later.

Compare options to see which works best for your situation. Owning the land gives you more flexibility in choosing the loan structure.

Loan Amounts Available

The amount you can borrow with a construction loan depends on:

• The appraised value of the land
• Total construction costs
• Your financial qualifications

Here are some general guidelines on how much you may be able to borrow:

• Up to 80% of land value + construction costs
• Up to 75% of completed home appraised value
• Up to 95% of construction costs alone

So if your land is worth $100,000 and construction will cost $200,000, you may be able to qualify for around $280,000 ($80k land + $200k construction).

Strong finances and substantial land equity can potentially help you secure higher loan amounts within these general parameters.

Getting Pre-Approved

Going through the pre-approval process is highly recommended when seeking a construction loan against land you already own.

Pre-approval verifies you qualify for the loan amount needed before you start building. This involves submitting key information/documents:

• Land deed and appraisal
• Credit history and scores
• Income verification (tax returns, pay stubs)
• Budget for construction costs
• Plans and specs for the new home

Having an experienced general contractor lined up is also key, as lenders want assurances the project will be completed on time and on budget.

The pre-approval process takes some time but gives you important peace of mind that your land equity will help finance building your dream home.

Finding the Right Construction Lender

Not all mortgage lenders offer construction loans, especially against land owned. Look for lenders like:

• Local community banks and credit unions
• Smaller regional banks that specialize in construction lending
• Online lenders like LendingHome, Build Finance, and Lightstream

Avoid large national banks as they tend to have strict limits on this type of lending. Ask friends for referrals to lenders they’ve successfully worked with.

Shop around and compare multiple loan estimates. Look for the most flexibility in using your land equity. This takes some work but maximizes your chances for approval.

Tips for Securing Financing

Here are a few final tips when trying to get approved for a construction loan against land you already own:

• Highlight experience of your contractor to reassure lenders
• Get land professionally appraised to verify equity amount
• Only apply with lenders that allow land as collateral
• Be ready to provide all required financial documentation
• Make a large down payment from land equity if possible
• Ask lenders what else you can provide to improve approval odds

With proper planning and smart shopping, you can often turn the land you already own into a prime opportunity to build and finance your ideal home. Evaluate different loan options and lenders to find the best fit for your situation.