How much do you need down on a land loan?

The short version, and why it is a range

There is no single land-loan down payment, and anyone quoting one number without asking about the parcel is quoting a brochure. What a lender will advance against dirt depends almost entirely on how quickly and how certainly that dirt turns into something that pays the loan back.

A finished lot in a platted subdivision, with power at the street and a builder under contract, is close to a construction loan that has not started yet. Something in the region of 25 to 30 percent down is normal, sometimes less if the construction financing is committed in the same package.

Forty acres with a gravel approach, no recorded access easement and no utilities within half a mile is a different product wearing the same name. Half down is common, and the deals that get funded at less than that usually have something specific carrying them: a large equity position elsewhere, a signed purchase contract from a builder, or entitlements already through.

Between those two poles sits most real land. The useful question is not "what is the down payment" but "which of the three ceilings is binding on my deal", because that tells you what you can change.

Three ceilings, and the lowest one wins

Every land loan we size runs through three separate limits. The loan comes back at the lowest of them. This is the single most useful thing to understand before you make an offer, because it explains why a lender can say yes to the borrower and still not get to the number the borrower wanted.

• Loan to purchase price. A percentage of what you are actually paying. This one anchors the loan to a real arms-length transaction rather than to an opinion.
• Loan to as-is value. A percentage of what an appraiser or a broker opinion says the parcel is worth today, unimproved and unentitled. On land this is often the binding limit, because land value is opinion-heavy and lenders discount it accordingly.
• Loan to total project cost. A percentage of everything going into the deal: the land, the horizontal work, the soft costs, the carrying cost. This one binds when a buyer is putting real money into improvements.

Why the lowest ceiling is usually value, not price

On a house, price and value tend to agree, because there are twenty comparable sales within a mile and the market has already argued itself to a number. Land has none of that. Two parcels on the same road can differ by a factor of three on the strength of a drainage ditch, a setback, or whose name is on the access easement.

So a lender treats the appraised value of land with more suspicion than it treats the value of a finished house. If you are paying 400,000 for a parcel and the appraisal comes in at 340,000, the value ceiling is computed on 340,000, not on what you agreed to pay. At a 65 percent limit that is 221,000 of loan against a 400,000 purchase, and your down payment just became 179,000 rather than the 140,000 you had budgeted.

This is the most common way a land deal surprises a buyer late. It is also the most avoidable. Ask for a broker opinion of value before you go hard on your earnest money, not after.

What actually moves the percentage

Credit matters less on land than most borrowers expect. It is a gate rather than a dial: below a certain score a private lender will decline or price the loan differently, and above it, further points buy you very little. What moves the advance rate is the parcel and the plan.

• Legal access. A recorded easement or frontage on a public road, not a track everyone has always used. Unrecorded access is the single fastest way to turn a 65 percent deal into a 50 percent deal, or into a decline.
• Utility distance. Power, water and sewer, measured in feet from the parcel rather than described as nearby. A lot 200 feet from a main and a lot 2,000 feet from it photograph identically and do not finance identically.
• Entitlement status. What the zoning permits today. A parcel that already allows what you intend to build is worth more to a lender than one that needs a hearing, because a hearing is a date on a calendar somebody else controls.
• The exit, stated specifically. Build and refinance, sell to a builder, or hold for entitlement and sell. A checkable plan is worth more than an enthusiastic one.
• Whether construction is in the same package. Land financing that rolls into ground-up construction can often be sized on the finished project rather than on the raw dirt, which changes the arithmetic completely.

A worked example, with the numbers visible

Take a 300,000 parcel, appraised at 300,000, that a buyer intends to build a single family home on within the year. Assume a lender using 70 percent of purchase price, 65 percent of as-is value, and 75 percent of project cost.

Loan to price gives 210,000. Loan to value gives 195,000. There is no construction budget yet, so the project cost ceiling is computed on the land alone and gives 225,000. The lowest is 195,000, so the loan is 195,000 and the down payment is 105,000, or 35 percent.

Now change one fact: the buyer has approved plans and a builder contract for a 250,000 build. Project cost is now 550,000, and 75 percent of that is 412,500. The value ceiling on the finished home, rather than the raw lot, is a different and much larger number. The land portion of that package is frequently advanced at a higher rate, because the lender is no longer lending against dirt that might sit. It is lending against a house that is being built.

Same buyer, same credit, same parcel, and a materially different down payment. The variable was not the borrower. It was whether the plan was in the file.

Land you already own is a down payment

If you own the parcel outright, or nearly, the equity in it usually counts as your contribution to the construction loan. This is the single most under-used fact in land lending, and it is worth understanding before you sell anything to raise cash.

A lender sizing a ground-up construction loan looks at total project cost, which includes the land at its value, not at the zero dollars you are currently spending on it. If the lot is worth 120,000 and the build is 380,000, the project is 500,000. A 75 percent loan to cost is 375,000. Your 120,000 lot is most of the 125,000 the lender expects you to bring, and in many files it is all of it.

The practical consequence is that buying land with cash now, and building with a loan later, can be a cheaper route than trying to finance both at once. It is also the reason a land loan and a construction loan should be planned as one conversation rather than two.

What else has to come to closing

The down payment is not the only cash in the deal, and a buyer who budgets only for the down payment usually finds the gap a week before closing.

• Closing costs. Title, escrow, recording and lender fees. On land these are not proportionally smaller than on a house, and title work on an unusual parcel can be slower and dearer.
• Points and origination, which come out at closing rather than being financed on most short-term land loans.
• Interest carry. Land pays no rent. Every month of the term is a month you fund out of pocket unless the loan carries a reserve, and a reserve is money you are borrowing and paying interest on.
• Survey, and often a perc test. If you intend to build, the septic feasibility question is better answered before closing than after.
• Liquidity after closing. Most lenders want to see that you still have reserves once the deal funds. Spending your last dollar on the down payment is itself a reason to decline.

Why bank land loans look cheaper and are harder to get

A community bank will sometimes quote a land loan at a rate well below what a private lender charges, and a buyer reasonably asks why anybody uses the private option. The answer is not the rate. It is what the bank needs in the file and how long it takes to assemble.

Banks generally want the permit set, the builder contract, sometimes the entitlements through, and a borrower who fits a credit box that was written for owner-occupied lending. That is a genuinely cheaper loan for a buyer who can wait sixty to ninety days and who has all of it ready.

Land that is worth buying rarely waits sixty days. The private land loan exists because the alternative is frequently not a cheaper loan, it is no parcel. The honest comparison is not private rate against bank rate. It is private rate against the deal you did not get.

How to find your number before you make an offer

Four inputs will get you within a few thousand dollars of your real down payment, and you can gather all of them in an afternoon.

• The purchase price, and whether the seller has any flexibility on terms.
• A broker opinion of value, or recent sales of genuinely comparable parcels. Comparable means similar access, similar utilities and similar zoning, not similar acreage.
• The distance in feet to power, water and sewer, and whether access is recorded.
• Your build plan and its budget, even in rough form. A number that is approximately right changes the sizing; no number at all leaves the lender sizing on dirt alone.

When the seller carries part of it

Land sellers are more willing to carry paper than house sellers, and on the right parcel that willingness is worth more than a rate concession. Somebody who has held forty acres for two decades often cares more about the tax treatment of the gain and the certainty of the close than about receiving every dollar on the day.

A seller second behind a first position land loan changes your cash requirement directly. If the lender is at 195,000 on a 300,000 purchase and the seller will carry 45,000 behind them, your cash at closing drops from 105,000 to 60,000. Whether a lender permits it varies, and it is a question to ask before you negotiate rather than after: some will allow a recorded second, some will allow it only if payments are deferred to maturity, and some will not allow it at all.

Two cautions. Disclose it. A seller carry discovered at title, rather than declared at application, reads as a misrepresentation and can kill a funded deal on the day. And count the combined payment: a first and a second on a parcel producing no income is two monthly obligations against zero monthly revenue, which is a carrying problem rather than a financing one.

What a lender will ask you in the first ten minutes

A competent land lender can size a deal roughly on a short phone call, and the questions are always the same. Having the answers ready is the difference between a same-day indication and a week of back and forth.

• What are you paying, and what is the parcel size and county?
• Is access recorded, and is there frontage on a public road?
• How far to power, water and sewer, in feet?
• What does the zoning permit today, and does your plan need a variance?
• What is the exit, and roughly when? Build and refinance, sell, or entitle and sell.
• How much cash are you putting in, and what is left after closing?

The part most buyers get wrong

The mistake is treating the down payment as a fixed toll and the parcel as the variable. It is the other way around. The percentage is an output of facts about the land and the plan, most of which you can influence, and some of which you can establish for the cost of a few phone calls before you are committed.

Buyers who ask a lender to size the deal before they write the offer consistently do better than buyers who write the offer and then go looking for the money. Not because they get a better rate, but because they find out which of the three ceilings is binding while they can still do something about it.