Can I use a section of raw land as equity for a down payment for our new home?

The land is financed by itself and we do not wish to include the entire property in with the new mortgage. Is this possible? We have owned the land for a couple of years and payed a large sum down on it.

2 Answers

Yes it is possible in some situations. If I understand your question correctly you are asking about building a home on land that you already own and can your equity in that land be considered when calculating the terms of the loan to finance the construction.

The property will need to be subdivided to arrive at the legal description of the parcel you want to build upon. This may require you to get permission from the city or county where the property is located. You will also need to negotiate with whoever is financing the property to have them release the subdivided parcel from their lien. They may or may not be agreeable to doing this. If they will not release the subdivided parcel from their lien, their lien will have to be satisfied with either the first draw of the construction loan or you will need to use your own cash to payoff the land financing.

If you have owned the land for over a year the terms of the amount you borrow will be based on the appraised value of the property after the home is constructed.

If you have owned the land less than a year, then the terms of the amount you borrow will be based on the lesser of: the cost of the land plus the cost of the construction (termed the 'acquisition cost'); or on the appraised value of the property after the home is constructed.

Let's say you have owned the land more than a year, that you have the property subdivided and the appraised value of the improved, subdivided property is $250,000. Note that the property can be appraised subject to the construction of the house so that you don't have to wait until the house is actually built to know the appraised value.

Let's further go on to say you qualify for a loan and the lender will loan you up to 80% of the appraised value. If you can build the house for $200,000 or less (80% of $250,000) you can borrow all of the amount necessary to construct the house and even include any amounts necessary to pay off the land financing of the subdivided parcel as long as the total does not exceed $200,000. The equity in your property is effectively serving as "down payment."

Good Evening,

Owning land and listing a value that exceeds the amount you owe only shows up as an Asset on your loan application. If you are looking to purchase a new home that is not on your land, that equity will not be counted towards your new purchase. If you are looking to build on land you already own for your primary residence, the scenario you are described would then be in your favor. I have access to a FHA Program that is a One Time Close Product that allows for an Owner Occupied Primary Residence Borrower to purchase land and build a home via a Modular Home or Manufactured Home through use of a Builder or Retailer (as some call the Manufactured/Modular home reseller). If this is something that interests you, feel free to let me know. Thank you and good luck!