How do I go from a land loan to a construction loan?
A construction loan replaces the land loan at closing: the construction lender pays off the land loan, counts the land at purchase price or appraised value as your equity, and funds the build in draws, usually once permits are approved. Time the land loan's maturity to land 6 months after the expected permit date to avoid a gap between the 2 loans.
The sequence
- Buy the land with a land loan, seller carry, or cash.
- Entitle and design the project while the land loan runs.
- Get permits approved or to a firm date.
- Apply for the construction loan with plans, budget, contractor, and the land loan payoff.
- Close the construction loan. It pays off the land loan and begins funding draws.
| Item | How the construction lender treats it |
|---|---|
| Land bought within about 12 months | Counted at purchase price |
| Land held longer or entitled since purchase | Counted at appraised value |
| Existing land loan | Paid off at closing from construction proceeds |
| Seller-carried note | Usually must be paid off; occasionally subordinated |
| Prepaid soft costs (plans, permits) | Often counted toward equity when documented |
Ranges vary by lender.
A worked example
Land bought two years ago for $250,000 with a $150,000 land loan, now appraised at $400,000 after entitlement. Build cost $1,200,000. Total cost using appraised land value: $1,600,000. At 75 percent loan-to-cost, the construction loan is $1,200,000. It pays off the $150,000 land loan and funds $1,050,000 of construction. Your equity is $400,000 of land value, so the cash you bring is the $150,000 gap between the build cost and the construction funds, plus closing costs and reserves.
Timing the two loans
The most common problem is a land loan that matures before permits are approved. Set the land loan term to the realistic permit date plus six months. If it is maturing early, ask for an extension in writing before the date; most land lenders extend a performing loan for a fee.
Documents the construction lender needs about the land
- Deed and title report.
- Land loan payoff statement.
- Purchase contract or settlement statement from when you bought it.
- Appraisal, ordered by the construction lender, with as-is land value and as-completed project value.
- Survey, and any environmental report.
One lender for both
Some construction lenders will fund the land purchase as the first phase of the construction loan when entitlements are close. That avoids two closings and the maturity mismatch. It requires plans and a budget at the time you buy the land.
How CommFi handles it
Our lending desk prices the land loan and the construction loan together, sets the land loan term to your permit timeline, and funds direct when it fits. When a lender that funds land as phase one is the better path, the desk searches a database of 7,000+ lenders and the ones that fit compete for the file. Zero upfront fees.
Related reading
Related questions
- Does the construction loan pay off my land loan?
- Yes. The construction lender pays off the land loan at closing and counts the land as your equity.
- How is my land valued for the construction loan?
- At purchase price if bought within about a year, or at appraised value if held longer or entitled since.
- What if my land loan matures before I get permits?
- Ask the land lender for an extension in writing before maturity. Most extend a performing loan for a fee.
- Can one lender fund both the land and the construction?
- Yes, some construction lenders fund the land purchase as the first phase when plans and entitlements are close.
- Can a seller-carried land note stay in place during construction?
- Usually not. Most construction lenders require it paid off at closing; a few allow subordination.
Property developer and licensed appraiser. 22+ years in real estate: TIC conversions, multi-unit redevelopments, mixed-use, fix and flips, commercial DSCR.