How to Use Land Equity as a Down Payment to Build a House

If you own land outright or you have a significant amount of equity in land, you can use it just as you would use any other tangible asset to establish a line of credit or take a loan. You can then use that money in whatever way you deem appropriate, including making a down payment to build a house. For best results, get your land appraised and check your credit report before you start the process so you have an idea of what your land is worth, and what type of interest rate you should be able to qualify for.

Land Equity Finances

It can be more difficult to get a land equity line of credit or loan than a home equity line of credit or loan, simply because a bank can repossess and resell a home more easily than a piece of land. You may have to contact numerous lenders to find a reputable institution that handles this type of financing. Expect to get a loan or credit line that’s less than the amount of actual equity you have in your land.

Using Your Equity Money

Once you obtain your land equity funding and use it for your down payment, you'll most likely be required to begin repaying the loan immediately. Factor this into your household budget, as you’ll simultaneously be making payments on a construction loan or on your new home mortgage while also making payments on your land equity loan or credit line withdrawal. Construction cost-overruns can put you in a perilous financial predicament.

Qualifying

Qualifying for a construction loan or mortgage can be an arduous process. Lenders will want to see proof of income, paycheck stubs and past tax returns. They'll also look at your credit report and determine how much debt you currently carry and your debt-to-income ratio. If your building or home lender pulls your credit and sees you have an existing, significant land equity loan or line of credit, it could count against you in qualifying for additional credit.

Considerations

Borrowing money for a down payment on new home construction can put you in a tenuous financial position. Some home lenders even require that you demonstrate where your down payment money is coming from, and they may express concerns about you taking out such a sizable loan in addition to your home mortgage. If for any reason you run into financial difficulties, experience construction delays or are forced to abandon the building process or sell your home, remember, you'll still be paying on your equity loan long after the sale closes.

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