Can I Use The Value Of My Land For A Downpayment For A Construction Loan?

Building your own home is the ultimate dream for many people. Of course, it takes commitment and it is certainly more complicated than purchasing an existing home. But, building your own means you get to design the layout and create the perfect home for you and your family.

It’s simply a bonus that building a home is generally cheaper than purchasing one.

Of course, you need to have the funds or the right finance package to make a build possible. If you need finance the first thing to be aware of is that the mortgage lenders will not be eager to help you. It’s much better to go to a reputable corporate finance specialist and get a deal tailored to construction projects.

The usual procedure when financing a home is to purchase the land first and ensure you have the necessary permissions to build on it.

You’ll then need to design your home and calculate the cost of building that home.

All this needs to be done before you can get finance. You’ll then be able to approach the finance companies with the cost of your build and the estimated value of your completed home.

The finance company will usually lend up to 80% of the value of your finished property, in some cases, the figure may be less. You’ll need to have a deposit to cover the difference before financial approval will happen.

The Value Of Your Land

The good news is that your land has value and, if there’s enough value, you can use it as a downpayment.  A simple example would be when you’ve paid $20,000 for your land and your finished home will be worth $100,000. The cost of the build is estimated at $80,000.

The finance company will lend you up to $70,000 or even $80,000, that’s 70-80% of the value of your finished home.

That means they’ll pay for all, or nearly all of the build, you may need a $10,000 deposit.

The value of your land is more than this, allowing the finance company to use this as your deposit and fund you the money.

The reason they can do this is that they know they will only lend you up to $80,000 but they have the right to sell the property, which will be worth $100,000. Of course, that’s only if you don’t repay the finance.

This means it is unlikely they will be out of pocket. On the plus side, you’ve managed to secure funding without having to find excess money after buying your land.

Points To Note

Don’t forget that a construction loan is different from a mortgage, once the property is finished you’ll have a short time to repay all the loan. The usual way to do this is by taking out a conventional mortgage.

There are also a number of additional expenses pre and post-build which you must be aware of to ensure you have enough funds ready.

Dragan Sutevski

Posted by Dragan Sutevski

Dragan Sutevski is a founder and CEO of Sutevski Consulting, creating business excellence through innovative thinking. Get more from Dragan on Twitter. Contact Dragan