How Much Land Value Counts Toward a Construction Loan?
By Andrew J. Liersch III — Founder & CIO, Slingshot Investments. 10+ years in private lending, $500M+ funded. Former Wells Fargo Private Mortgage Banking, Bear Stearns, and Deloitte Consulting.
Short answer: If you own your lot free and clear, its appraised value typically counts as equity toward your down payment — and on many deals, it covers the entire cash requirement, letting you close with little more than closing costs. If you’re buying the lot as part of the loan, the lender advances roughly 50–60% of the purchase price at closing. And if you’ve owned the land long enough — commonly 12+ months — most private money lenders credit today’s appraised value, not what you paid, which means entitlement work and market appreciation both count as equity you already earned.
Land is the piece of the construction loan structure borrowers most often undervalue in their own favor. Here’s how lenders actually count it, scenario by scenario.
Scenario 1: You’re buying the lot with the construction loan
One loan, one close: the land advance funds the purchase, the holdback funds the build. Private money terms typically advance 50–60% of the lot’s purchase price at closing — sometimes more when the lot comes entitled with permits ready to issue, because entitlement status drives terms more than any other single factor. The gap between the purchase price and the advance is part of your cash to close, alongside whatever equity the overall sizing caps require.
Scenario 2: You own the lot free and clear
This is the strongest position in construction lending, and it’s worth stating plainly: your land equity is your down payment. The lot’s appraised value counts as cost you’ve already contributed, so the loan-to-cost math treats you as having equity in the project on day one.
Run the numbers on the Del Cerro build from our structure article — $1,000,000 total project cost, $850,000 loan, which normally means about $150,000 cash in. Now suppose you already own that $350,000 lot outright:
| Buying the lot | Own it free and clear | |
|---|---|---|
| Total project cost | $1,000,000 | $1,000,000 |
| Loan (lesser of dual caps) | $850,000 | $850,000 |
| Equity required | ~$150,000 | ~$150,000 |
| Land equity credited | $0 | $350,000 |
| Cash to close | ~$150,000 + costs | ~Closing costs only |
Your $350,000 of land equity doesn’t just cover the $150,000 requirement — it exceeds it, which strengthens the whole file. Same project, same loan, radically different cash position.
Scenario 3: You own the lot with a land loan on it
Still workable — the construction loan pays off the land loan at closing (it has to; the construction lender needs first position), and your net equity is what counts: appraised value minus the payoff. A $350,000 lot with a $150,000 land loan contributes $200,000 of equity. The payoff also consumes part of your loan proceeds, so the interplay with the dual caps gets checked early — bring the land loan statement to the first conversation, not the last one.
What value does the lender use — purchase price or appraisal?
The seasoning question, and it matters more on land than anywhere else:
- Recent purchase (commonly under 12 months): lenders generally use the lesser of your purchase price or appraised value. You can’t buy a lot Tuesday and claim it doubled by Friday.
- Seasoned ownership (commonly 12+ months): lenders generally use current appraised value. Appreciation since you bought is real equity, and so is value you created.
That second point is the one builders miss: entitlement work adds appraised value. A raw lot you bought for $250,000 and carried through plans, permits, and approvals might appraise at $350,000 entitled — and on seasoned ownership, that $100,000 of created value counts as your equity, even though it never passed through your bank account. Your architecture and engineering spend belongs in total project cost too, as soft costs you’ve already paid.
Are there limits on how much land can count?
Two practical ones. First, land equity works as a down payment, not a piggy bank — construction loans generally don’t cash you out against the lot at closing; the equity offsets your requirement rather than generating proceeds. Second, proportion matters: when land makes up an outsized share of total project cost — as a rough rule, much past a third — lenders look harder, because a loan secured mostly by dirt until the vertical rises carries a different risk than one where the budget dominates. Neither limit changes the headline: on a typical SFR or small multifamily build, owned land is the cheapest equity you will ever contribute.
Frequently asked questions
Can land be my only equity in the deal? On many deals, yes — if the land equity meets or exceeds what the dual sizing caps require, you close with little beyond closing costs and any interest reserve funding.
Does inherited or gifted land count? Generally yes, at appraised value, with title vested in you (or your entity) and the usual seasoning logic applied. Bring the vesting documents.
I bought my lot below market. Do I get credit for the discount? Not immediately — a recent purchase is typically valued at the lesser of price or appraisal. Season the ownership and the appraised value takes over.
Do I still need cash for anything if my land covers the down payment? Closing costs, typically the interest reserve if it isn’t financed inside the loan, and working capital to front phases between draws — draws reimburse completed work, so liquidity still matters even at zero down.
Slingshot Investments originates and arranges business-purpose ground-up construction loans on non-owner-occupied residential and commercial real estate. California DRE License #02002790. All loans subject to borrowers and underlying collateral meeting current underwriting criteria. Rates and terms subject to change without notice. This article is general information, not a loan commitment or financial advice.
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