Your Lot and Your Loan: How Land Fits Into Construction Financing

Land is part of your total project cost, so it directly affects how much you can borrow and how much cash you need. If you already hold the lot, many lenders will count it toward your equity, and if you are buying it, many will fund part of the purchase at the same closing as the construction loan.

Land sits inside the project, not beside it

Lenders add the lot to hard costs, soft costs and contingency to get total project cost. Leverage limits, like loan to cost, apply to that total. So a pricey lot raises the cost base, and it also has to be justified by the finished home's value. Overpaying for land is one of the fastest ways to squeeze a construction deal. The lot also has to be ready to build: RSC Private Lending's New Construction program requires entitled land with a survey.

When the lot is already yours

Owning the land free and clear is a strong position. Many lenders treat it as equity in the deal, which can reduce or even replace the cash you would otherwise bring. Lenders differ on whether they credit what you paid or the current appraised value, and how long you must have owned it for the current value to count. If the lot has a loan on it, that loan usually gets paid off at the construction closing.

When you are still buying the land

You can often buy the land and close the construction loan at the same time. The loan covers a share of the purchase price, you pay the balance, and the build budget sits in a holdback for draws. One closing keeps the project on one timeline and avoids paying for two loans. Many lenders fund a smaller share of land than of construction, so expect a larger down payment on the land portion. RSC's New Construction program funds up to 75% of the lot and 100% of construction, with the loan capped at 90% of total cost.

Example

Example (illustrative numbers only): Total project cost is $460,000: a $90,000 lot plus $370,000 for the build and soft costs. At an 80% loan to cost, the loan is $368,000 and the investor needs $92,000 in equity.

• Investor A is buying the lot and brings $92,000 in cash at closing.
• Investor B owns the lot free and clear. If the lender credits its $90,000 value, Investor B needs only about $2,000 more in equity, plus cash for closing and carrying costs.

What this means for you

Treat land as the first line of your budget, not a separate decision. Make sure the lot price fits the finished home's value, and ask early how your lender treats land you already own. That one answer can change your cash needs by tens of thousands of dollars.

Have a lot or eyeing one? Send RSC Private Lending your scenario for a term sheet in 24 hours. All loans are business-purpose and subject to underwriting.