Land as Down Payment for Construction Loan

We are in the process of obtaining a loan for construction and have come across the question of is it better to by the land up front and have it free and clear, or include it in the loan and make a cash down payment.

Hi Megan,

Your loan officer should be able to tell you what is required as your down payment. Often, using land that is free and clear as the down payment can cause problems.

A diligent lender will then have to research and trace the land payoff transaction, which could cause a delay in your loan approval and the loan closing.

Your lender will order an appraisal of the new house from blueprints as part of the loan approval process and the appraiser will also determine the current market value of the land.

If the required down payment is 20-25% (of the cost of the project) and the cost of the land as well as its market value meet that requirement, you should pay the land off at the closing of your construction loan, but not before.

No loan officer can guarantee your loan, even if approved, will “close”!

Your loan officer will coordinate the payoff of the land at your construction loan closing. It is called a simultaneous closing.

I have always told people, "don't buy or payoff land until you have your construction financing locked in!" In today’s lending market, “locked in” means you are sitting at the closing table signing the closing documents.

Buying land before getting your construction loan closed is dangerous...especially in today's conservative lending market. If the loan falls through (doesn't close) you will have your money tied up in a relatively non-liquid asset.

If you are worried that you may lose a particular piece of land if you don't hurry up and buy it, you should follow my advice in chapter 2 of my book, "Be Your Own House Contractor", and make an offer to purchase the land "contingent upon locking in a construction loan", or contingent upon construction loan approval with the land payoff to be at the closing of the construction loan.

("Contingent" means, "dependent on something else", in this case, getting a construction loan.
No loan, you get your earnest money (deposit) back.)

Be sure to read How to Buy Land and Build a House.

Good luck, Carl Heldmann,