How to Use Land Value to Finance a Building
Landowners can take out loans secured by plots of land and use the proceeds to finance the construction or purchase of a building on the same plot or elsewhere. Lot loans are a form of mortgage, and liens are recorded on financed lots in the local county courthouse. Generally, rates for lot loans are higher than rates for home loans, but someone building a home can use a lot loan to get immediate access to the cash needed for construction.
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Instructions
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Locate your W2s for the past two years or your tax returns if you are self-employed. If you have a survey of the lot, then put it together with the income documents. If you do not have a survey, go on the county website and find out the exact plot location and the legal description.
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Get a builder to provide you with a detailed quote for the building you intend to have constructed. If you are planning to buy an existing building, contact the seller or the seller's agent to determine the exact property address and sales price.
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Provide two or three local lenders with the details of the plot of land you own and your income documentation. The lender uses the income information and your credit report to approve you for the loan. You must also provide the lender with at least 60 days of bank statements once pre-approved to prove that you have the necessary funds for a down payment and closing costs.
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Review the loan terms offered by the different lenders. Each financial institution sets its own loan-to-value limits that specify the maximum size of a loan as a percentage of the total cost of a piece of collateral. LTV guidelines vary, so choose a lender who can allow you to borrow sufficient funds to finance the home. Choose a lender and provide any other documents that are requested.
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Arrange a closing date. If you are buying a home, the lender must set a closing date with you and the seller. If you are building a home you can set the closing whenever you wish, but make arrangements with the builder to begin work as soon as possible after the closing.
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Tips & Warnings
Many lenders write construction-to-permanent loans that are designed to finance the construction of a building on a piece of land. The loan amount covers the cost of building the home, and the lender records a lien against both the land and the home. Funds are released incrementally to cover each stage of the building process. Lenders only write these loans for people who hire licensed contractors to build the home and not people who build the home themselves -- unless they are licensed contractors.
Lot loans often begin with an interest-only term after which you must make a balloon payment. If you cannot raise funds for the balloon payment, you stand to lose the land and any structure that you built upon it.
