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Using Land as a Down Payment for a Home Loan: What You Need to Know

You can use a piece of land you own for the down payment on a home loan. This is even true if you are seeking a loan to build a home on the property you currently own. However, since the land is vacant, there are several considerations that will determine the size of the loan you achieve. Further, you may face higher interest rates by using land as the down payment on any loan rather than placing a cash down payment.

Step 1

Determine the value of the land you would like to use as collateral. You will need the original deed to the land to show ownership. You will also need a current appraisal of the value of the property. The lender will want to know what the collateral is worth prior to issuing any loan.

Step 2

Get a builder to estimate the cost of building your home. The builder will provide a good faith estimate of the cost to build a home on the property to your specifications. The builder will also quote the estimated value of the home once construction is complete. This number will be the total cost of building your home; since you already own the land, only the cost of construction must be provided through a loan.

Step 3

Contact a mortgage lender for approval on a loan. The lender will consider the size of loan you are seeking against the estimated value of the property once the home is built. For example, if the builder estimated the home would be worth $250,000, and you need a $200,000 loan to complete construction, the lender is extending a loan worth 80 percent of the value of the property. This means your down payment, i.e. the value of the lot, would need to be 20 percent.

Step 4

Provide additional down payment where necessary. The lender may ask you to supplement the land down payment with a cash down payment. This is particularly true if the quality of the land is in question. For example, land that has not yet been graded and plumbed is often valued lower than land that is "builder-ready." Therefore, you may need to add more money to ensure your down payment is high enough.

Step 5

Pay closing costs. Even if you are using land as a down payment, you will need to provide the lender with cash to close. Closing costs typically range from 3 to 5 percent on a mortgage loan.

Tip

You may consider a hard money loan against the land for the building process. Many mortgage lenders will require you refinance your loan after the final home is in place, and the value of the home may change at that point. A hard money loan will use the land as collateral for temporary financing to pay for the construction only. You will only seek a mortgage after the home is built in this model.