Getting a Construction Loan on Land You Already Own

If you own the land free and clear, its value usually counts as your equity, and a construction lender will typically fund 70 to 85 percent of the total project cost, capped at 65 to 75 percent of the finished value. In many cases that means little or no additional cash down. The lender's questions are about the plan, the builder, the budget, and how the loan gets paid off when the building is done.

This guide explains how land equity is counted, what the loan looks like, what you will need to provide, and where builds go sideways.

How lenders count your land

Lenders measure a construction loan two ways at once: loan-to-cost (LTC) and loan-to-value (LTV). Cost is land plus hard costs plus soft costs. Value is what the appraiser says the finished project will be worth.

Your land enters the cost side at one of two numbers:

• Purchase price, if you bought it within roughly the last twelve months.
• Appraised value, if you have held it longer, or if you have entitled it or improved it since buying.

The loan also cannot exceed the LTV cap. If the finished building appraises at $1,700,000 and the lender caps at 70 percent LTV, the loan cannot be more than $1,190,000 regardless of cost. The lower of the two limits governs.

If the land has a loan on it, the construction loan pays it off at closing, which reduces the equity the land contributes.

What the loan looks like

Construction loans are short-term and interest-only, usually 12 to 24 months, with an option to extend. Funds are released in draws as work is completed and inspected, not all at once. Interest is charged only on the amount drawn so far. Most lenders build an interest reserve into the budget so the payments are made from the loan during construction.

Banks are cheaper and slower and want more experience. Private lenders are faster, more flexible on experience, and more expensive. Many first builds start private and refinance into a bank or a DSCR loan once the property is leased.

What you will need to provide

1. Plans and specs. Stamped architectural drawings and a scope of work.
2. Permits or entitlements. Approved permits, or clear evidence they are weeks away. Unentitled land is a land loan, not a construction loan.
3. A line-item budget. Hard costs, soft costs, and a contingency of 5 to 10 percent. The lender will have it reviewed.
4. A contract with a licensed general contractor. Fixed price or guaranteed maximum. Owner-builders are accepted by some lenders with a track record.
5. Builder's risk insurance and general liability, with the lender named.
6. Your experience and liquidity. A personal financial statement, proof of reserves (often 10 percent of the loan), and any prior projects.
7. Exit plan. The permanent loan you will refinance into, or the sale comps if you are building to sell.

The draw process

After closing, you or your contractor submit a draw request with invoices and lien releases. The lender sends an inspector to confirm the work is in place, then funds the draw, typically within five to ten business days. Expect a fee per draw. Keep the schedule realistic: a lender that sees the budget running ahead of the work will slow the draws, and a slow draw process is the number one complaint on construction loans.

Where builds get stuck

• Cost overruns. A thin contingency is the usual cause. Ten percent protects you.
• Permit delays. Closing a construction loan before permits are in hand costs interest on money you cannot use.
• Change orders. Each one changes the budget the lender approved. Get them approved in writing.
• Exit not confirmed. Know the permanent lender's requirements before you start, especially the occupancy and seasoning they need after completion.
• Appraisal lower than cost. If the finished value does not support the budget, the lender reduces the loan and you cover the gap.

Ground-up on land you own vs buying land and building

Owning the land removes the hardest part of a first build: the equity. Lenders see a borrower who has already committed and can move quickly on the rest. Buying land and building at the same time usually requires 25 to 35 percent cash across the whole project and a lender comfortable with a two-phase close. If you are new to development, read ground-up construction for first-time developers before you finalize the budget.

How CommFi handles it

Send the plans, the budget, and the land information in one application. Our lending desk prices the project first and funds direct when it fits. Construction lending is specialized by asset type, size, and geography, so when the project needs a particular lender, the desk searches a database of 7,000+ lenders and the ones that build in your market compete for it. Zero upfront fees.

Next step

Start the ten-minute application. The pre-qualification letter you receive states the loan amount and structure, which is useful when you are lining up a contractor or a permanent lender.