Why not get a one time close construction loan. Your house should appraise at $285,000 ($85,000 for land + $200,000 for House). Since you own the land you easily have 20% down and will not need PMI.


A lot of banks won’t give a construction loan on a house that has started a build.

Don't do any improvements on your land until you speak with the bank. This was a big No, No with our credit union. They even sent the surveyor out the day of the closing to make sure no work had been done. (They don't want the potential for mechanic liens.)

This is generally how our construction loan worked...We used our land value as part of our available funds. After we closed on the loan, we had to spend the rest of our out of pocket funds BEFORE we could make our 1st draw request. Once we made the request, they sent out an inspector who gave the bank a recommended maximum draw amount based on work complete/materials onsite. The bank deposited that amount into our account & we started incurring interest on the funds released. During construction we only pay interest on the loan. Our construction loan automatically converts to a 30-yr mortgage at the end of construction. Hope that helps.

I would worry that when the time came that you needed a loan to finish the financing may not be there.

Great advice so far.

Very hard to find a bank to lend after you've started.

First go see that bank you've mentioned. If they are the primary player in your region, then you start there. Construction loans can be shopped but its more of a relationship product. And if you run into snags, its good to nurture.

Don't close on the loan until you have a line item estimate of your project (your estimates sound low but I have no idea of your area costs & size of build. I'm using $40-80K per month on my builds.) This bank will also have an opinion of your budget, as they have local expertise.

A bank will only lend what the finished value is.

If the house plus land equals out to $250,000 as an example, the bank will only loan you 70-80% of what they deem the finished house value to be. So they will loan you at 80% $200,000 or at 70% $175,000.

However if the land plus finished house will only appraise out at say $200,000, then the bank will only loan you $160,000 at 80% or $140,000 at 70%.

In either case, you will have to come up with the cash for the 20-30%.

Work with the bank. Having the funds you have and the land should make your slam dunk for a loan. The bank will usually want you to "pay down" the rest of your investment before they start with their draws, but then it's all part of the project. DO NOT start and then try to get financing. (Besides, waiting in this environment is risky with interest rates.)

Schedule an appointment to talk with the lender at the bank other owner-builders have worked with. Don't get caught up in the current market value of your land...it is irrelevant.

The bank will (most likely) not lend more than 80% of the appraised value of the final product. How much will an appraiser say the house on the 5 acres will sell for when completed?

My bank will let owner sweat equity count towards the 20% down...it doesn't have to be actual cash. My lender will also allow us to start the house and come see them when we are out of funds, but this is not typical.

Very few banks will do owner-build construction loans. Each have their own rules. Go talk to your lender. But the bottom line is your land value doesn't matter. What matters is what your property will sell for once completed. For all we know, your bank may only lend 60% of the appraised value on owner-builds. Make an appointment and get their rules.

The value of the land without a house on it is irrelevant once you put a house on it. You can't sell the land without the house or the house without the land.

The appraised value of the combined house/land AFTER it's built is the only thing that matters. That may be more, less, or equal to the value of the the land without the house plus the cost to build the house.

As an analogy, imagine getting a $5000 paint job for a car.

If the car is a junk heap, the end value of the car with the paint job may be less than 5 grand.

If the car is an obnoxious bright pink high end sports car then painting it red may actually increase the value of the car more than 5 grand.

Either way, it doesn't matter what you paid for the paint job. All that matters is the end result. And you can't separate the paint from the car.

Just to clarify--when I said we used our land value as part of our available funds, that value was based on an appraisal of the proposed final product. I submitted our house plans and survey to the bank and they had the project appraised. Our land was owned out-right, so the post-development appraised value of the land was counted towards our 20% minimum out of pocket expenses.

I think it depends on your bank. Basically, the bank will not lend more than 80% of the appraised value of the final product.

I think it depends on your bank.

As a manager of private mortgage funds, I would amend "bank" to "lender". We have lent on the value of land alone and on houses under major renovation.

As others have noted, approaching the lender with a half-built house is a mistake, as the lender may well have a different evaluation of the house's contribution to the value of the property.

It depends on your bank's conditions

It’s actually very relevant depending on the location. Land located in a sought after location will always be valued high by the bank.

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