How to Use Land As Equity for a Construction Loan

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A construction loan provides funding for a new home.
A construction loan provides funding for a new home. (Image: home construction image by Joann Cooper from <a href='http://www.fotolia.com'>Fotolia.com</a>)

A construction loan is provided for a borrower to construct a house or building on property. Since a construction loan is a nonstandard loan, it is generally set up as an interest only loan and payments are required during the construction. Also, many lenders require that a borrower provide a down payment of 5 to 10 percent. If the borrower owns land, the equity may be used to secure the construction loan in lieu of a down payment.

Things You'll Need

  • Deed
  • Loan application
  • Loan documents

Find a lender who offers construction loans. Generally, local banks have programs that provide construction loans, since they offer in-house financing that does not require the loan to be submitted to an outside underwriter.

Take a copy of the deed to the land showing you as the owner, your income statements, copies of tax documents, employment verification and equity statements from retirement accounts, such as a 401K, to a lender who offers construction loans.

Complete an application for a construction loan. Tell the lender that you want to use the equity in land that you own to secure the construction loan. Give the lender details, such as how long the project will take, the total estimated cost and future plans for the constructed property, such as business or residential.

Sign the loan documents and supply the title to the land. Use the funds provided by the construction loan to complete the project. Make the payment required on the loan while the construction is taking place.

Convert the construction loan to a residential mortgage after the construction is completed. Obtain a mortgage to pay off the construction loan and include the land with the new mortgage. Contact a mortgage broker to receive quotes on loan interest rates. This opens up options for a lower interest rate loan, which saves you money.

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