Check with several lenders. It seems they all have slightly different requirements when it comes to this.

Also remember 1 + 1 does not necessarily equal 2. That is, a 75k lot with a 350k cost building on it does not equal 425k appraised value. It can, but often it does not.

Best to talk with some lenders in your area rather than speculate.

Good luck!

rjinga- I agree with jn3344-

A good, ethical mortgage broker could be your best friend on this one. These are the folks who deal with several (often many) lenders and are very well educated on all the different products available to you. They can help you wade through options.

Your land is free and clear There are lending products that are "construction-to-permanent" financing, where both the value of the land and the build are rolled together at the end of construction. The lender will still want to make sure the value proposition (equity at the end of the build) will make sense, protect them. So they'll want to check your plans/budget, pre-construction. But it can work.

Just take care that you're not outpacing your equity through fees/interest, with any choice you make. Protect yourself, as well.

Let us know progress.

I actually may have misunderstood the OP's needs (from building a home forum)...it did sound interesting that maybe the investment in the land would help in some way...However, we will have a cash down payment, which we are saving for now, so maybe the land equity won't really matter? My husband pointed out that perhaps the OP may not have the cash needed for the down payment and needed the land to help get the loan? We don't necessarily need the land to get the loan, I was just curious about if or how it could help...we don't want to compromise our ownership of the land (in other words, don't want the bank to own it)..so are there any other ways that it could play a part or make any difference?

Hmm- still think a good mortgage broker will make it all clear. Personally, I've never heard of a lender who would underwriter a loan without adding in the land it's built on as part of the security. From their perspective, what good would a 350K home do them, if they couldn't sell it in the event of a default? Not casting aspersions on you at all. This is just how they think. Once your house is built, this is a whole property for lending purposes, not two separate entities. The only way I can see for you to build/live on this property without rolling in your land is to either pay cash for the build OR put a mobile home/yurt whatever on it- and pay cash.

Still- your land equity will do you a LOT of good, in permanent financing, and you can potentially protect the initial cash investment. Caveat: You have to make certain you're not over-improving for the area. For this purpose, I'm going to assume you're not. Round numbers, for illustration purposes only that is absent any knowledge of real values in the area. Consider:

Equity in project--- 160,000- assumes a 90K land value and a 70K down payment

Value of structure-- 350,000

If you finance the entire build (and you stick with $350K) you'll end up somewhere in the area of $170K-190K in equity for your property- as long as local sales comps compute. Of course, you'll have to look at your finance charges for the build, closing costs. Still?

If your value proposition is correct with your build, you could get built-in equity that is just over/under double that of your current land value, if your numbers are solid. Talk about protective! That's a bankable investment for most underwriters, and could positively affect your points, interest rate etc.

Get with the pros: 1) Local Realtor. Find out comps of sales of improved properties, in your area 2) Lender/mortgage broker. Find out the costs of financing/vehicles available to you. 3) Builder- are your realistic in your cost estimates, for the build you want to affect. Don't give them a budget-give them specs, preferably plans.

You could add 4)- a local appraiser, who is one of the better resources to determine value, as a bank would see it and as you would like.

You need a construction loan- apply with your plans, deed to your lot and a licensed contractor. You will be approved based on the proposed value of what you are building and the land it's built on. There are draws upon substantial completion of each phase of construction (foundation, rough framing, roofing, etc) and after inspections of each phase. After house is completed you will apply for a regular ammortizing mortgage which will pay off the construction loan. We did this, our construction loan was interest only for a one year period.

When I built, I used a construction loan. I owned the land free and clear. I had about 50% of the cost to construct in cash. I went to the local bank. The local banker loved the deal. He knew the builder. He had a certain amount that he was authorized to lend without consulting anyone. Our needs were within his check writing authority. We had one construction draw and a completion check. We didn't need an appraisal because our loan to equity was so high.

Upon completion, I could have used this banker to write the permanent loan. My credit union beat his rates, so I went with them for the permanent loan. I did need an appraisal for that loan. But, it was a completed home at that point. The banker made a nice little profit for lending for about 90 days with a mostly secured property.

Might be wrong but I believe the bank doesn't want to front 100% of your construction loan, they don't care what your paid for your land, just that its clear, but want you to pay 20% of the construction cost. They won't loan more than 80%. Your land ownership is not a down payment for construction.

cmarlin,

That is not how my construction to perm loan went down. I built a custom home that was placed on a lot that I had a lot of equity in. This lender DID appraise my lot and used the equity as my down payment. This was 10 years ago.

This lender DID appraise my lot and used the equity as my down payment.

Are you sure they appraised the lot?

Or did they appraise the lot + house (after it's built) as a single unit and then subtract the cost to build the house? And THAT value is the equity that you essentially have.

In some cases that may essentially be the value of the land. But in some cases, the cost to build the house is more than what the value of the house is at the end. In that case, the equity would be less than the value of the land.

To illustrate it with an extreme example:

Raw land is worth 100k.

Cost to build some house is 200K.

But the appraisal at the end (for land and house since it is now one thing) is only 150k (for whatever reason. Maybe you built a stupid house that you like but nobody else would, or material/labour costs have skyrocketed but there are tons of empty existing houses available, etc).

The bank is NOT going to let you use 100K 'equity' and give you another 100k to build the house. They'd be out 200K and sitting on an end result that's only worth 150K.

Greg_2015 makes a great point. This is why construction loans are risky and come with higher interest costs relative to home loans and require better credit scores. The risk is greatest when the home is merely an incomplete idea.

At this point, the OP has plenty of perspective. I'd like to hear how it's going, on their end.

We are not ready to start yet, still gathering information, researching local builders, discussing what we want, looking at plans to get ideas..this topic just came up on another forum and I was curious about it. When we start the process, at least I've got some information to discuss and explore. thanks for your input

We were going to get a construction loan through Farm Services of Iowa, and they appraise your land. If the land appraises high enough then it can cover your down payment. Their loans were very flexible and did everything in house so their rates were a little higher than Freddie and Fannie.