How Does a Construction Loan Work When You Don't Own the Land?
When you don't own the land, you can still get a construction loan through a land acquisition + construction combo loan. This financing option bundles the land purchase and construction costs into a single loan, allowing you to buy the property and build in one streamlined process. These loans typically require 10-25% down payment on the total project cost and convert to a permanent mortgage once construction is complete.
At Clear House Lending, we specialize in helping buyers, builders, and developers secure construction financing even when they don't currently own land. Whether you've found the perfect lot or are still searching for the right property, understanding how these combined financing options work will help you plan your project and budget with confidence.
Understanding Land + Construction Combo Loans
A land + construction combo loan is specifically designed for situations where you want to purchase land and build on it but don't have the capital to buy the property outright before securing construction financing. Instead of obtaining two separate loans, you apply for a single loan that covers both the land acquisition cost and the full construction budget.
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How the Funding Works
When your loan closes, the first disbursement goes directly to the land seller to complete the property purchase. The remaining loan funds are held in reserve and disbursed in stages (called "draws") as construction progresses. You only pay interest on the funds that have been disbursed, keeping your carrying costs lower during the building phase.
Once construction is complete and you receive a certificate of occupancy, the loan either converts automatically to a permanent mortgage (one-time close) or you refinance into a separate permanent loan (two-time close). Either way, you end up with traditional mortgage payments on a finished home.
Why Lenders Offer Combined Financing
Lenders provide combo loans because they actually reduce overall risk compared to financing land and construction separately. When both phases are bundled together, the lender has a clear picture of the entire project from the start. They can evaluate the land value, construction plans, and your ability to complete the project as a unified decision rather than piecemeal approvals.
This integrated approach also ensures borrowers are committed to actually building on the land rather than speculating on raw property appreciation, which gives lenders greater confidence in the loan.
The Complete Land + Construction Loan Process
Understanding the step-by-step process helps you prepare properly and avoid delays that could jeopardize your project timeline or purchase agreement.
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Step 1: Get Pre-Approved First
Before you start shopping for land, get pre-approved for combined land and construction financing. This accomplishes several important goals:
- Know your budget: Understand how much you can spend on land plus construction combined
- Strengthen your offer: Sellers take pre-approved buyers more seriously
- Identify requirements: Learn what documentation and qualifications you'll need
- Set realistic expectations: Understand the down payment and rate you'll likely receive
During pre-approval, lenders evaluate your credit score, income, debts, and assets to determine your maximum loan amount. They'll also discuss the types of properties and construction projects they finance.
Step 2: Find Suitable Land
With pre-approval in hand, you can search for land with confidence. However, not all properties qualify for combined financing. Lenders typically require:
- Proper zoning: Land must be zoned for your intended use (residential, commercial, etc.)
- Utility access: Preference for lots with water, sewer, and electric at or near the property
- Road access: Legal access to public roads, either directly or through recorded easements
- Clean title: No liens, encumbrances, or ownership disputes
- Environmental clearance: No contamination, wetlands issues, or protected habitats
When you find a suitable property, work with a real estate attorney to draft a purchase agreement that includes financing contingencies. This protects you if the loan doesn't get approved.
Step 3: Finalize Construction Plans and Budget
While under contract for the land, you'll need to finalize your construction plans with an architect or builder. Lenders require detailed documentation including:
- Complete architectural drawings and specifications
- Itemized construction budget with all costs broken down
- Timeline showing construction phases and estimated completion
- Contractor bids from licensed, insured professionals
- Proof of required permits or permit applications
The more detailed and professional your construction package, the smoother your loan approval process will be. Vague or incomplete plans are a common reason for delays and denials.
Step 4: Complete Loan Application and Appraisal
With your land contract and construction plans ready, submit your full loan application. The lender will order an appraisal based on the "as-completed" value of the property, meaning they'll estimate what your finished home will be worth, not just the current land value.
This appraisal is crucial because your loan amount is typically limited to a percentage (usually 80-90%) of the lower of the as-completed appraised value or your total project cost. If the appraisal comes in low, you may need to increase your down payment or scale back the project.
Step 5: Underwriting and Approval
During underwriting, the lender verifies everything:
- Your financials: Income documentation, tax returns, bank statements, employment verification
- The property: Title search, survey, environmental review, zoning confirmation
- The project: Construction plan review, budget analysis, contractor verification
- The appraisal: Ensuring value supports the requested loan amount
This phase typically takes 30-45 days for land + construction loans, longer than standard mortgages due to the additional complexity. Respond promptly to any requests for additional documentation to keep the process moving.
Step 6: Closing on Land and Beginning Construction
At closing, funds are disbursed to purchase the land, and you take title to the property. Remaining construction funds are held in reserve. After closing, you can begin construction according to your approved plans.
As work progresses, you'll request draws from the lender. Before each disbursement, an inspector verifies that the claimed work has been completed satisfactorily. This draw process protects both you and the lender by ensuring funds are used appropriately.
Financing Options When You Don't Own Land
Several financing structures can help you purchase land and build when you don't currently own property. The best choice depends on your timeline, financial situation, and how quickly you're ready to begin construction.
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Land + Construction Combo Loans
This is the most common solution for buyers ready to purchase land and start building within 30-60 days of closing. The single-loan structure simplifies the process and reduces total closing costs compared to separate financings.
Clear House Lending offers combo loans through our vertical construction and horizontal construction financing programs, providing flexible solutions for residential and commercial projects of all sizes.
Construction-to-Permanent Loans
Also called "one-time close" loans, these combine the construction phase and permanent mortgage into a single product. You close once, pay one set of closing costs, and your construction loan automatically converts to a fixed or adjustable-rate mortgage when building is complete.
The main advantage is simplicity and cost savings. The main disadvantage is less flexibility if your plans change and potentially higher initial rates since you're locking in permanent terms before construction even begins.
Separate Land and Construction Loans
If you want to purchase land now but won't be ready to build for 12-24 months, separate financing may make more sense. You'd get a land loan first (typically requiring 20-30% down with 3-5 year terms), then apply for a separate construction loan when you're ready to build.
This approach provides maximum flexibility but means two closings, two sets of fees, and the need to qualify twice. You also take on interest rate risk since permanent financing rates may be higher when you eventually convert.
Alternative Approaches
Seller financing allows land sellers to act as the lender, providing more flexible terms than traditional bank financing. If a seller is willing to carry paper, you might negotiate a lower down payment or delayed payments while you arrange construction financing.
Bridge loans provide short-term funding to acquire land quickly while you arrange longer-term financing. This approach works well for investors competing in hot markets where properties sell fast.
One-Time Close vs. Two-Time Close: Which Is Better?
Choosing between one-time close and two-time close construction loans significantly impacts your costs, complexity, and flexibility.
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When to Choose One-Time Close
One-time close loans work best when:
- You want to lock in today's permanent mortgage rates
- You prefer a simpler process with one closing
- Your plans and budget are finalized and unlikely to change
- You want to minimize total closing costs
The convenience factor is significant. With one closing, you deal with paperwork once, pay fees once, and have certainty about your permanent financing terms from day one.
When to Choose Two-Time Close
Two-time close loans work best when:
- You want flexibility to adjust plans during construction
- You believe rates may drop before you're ready for permanent financing
- You want to shop for the best permanent loan terms later
- Your construction timeline is uncertain
The flexibility can be valuable, especially for complex projects or uncertain markets. However, you'll pay more in total fees and face the risk that rates could rise before you lock in permanent financing.
Qualification Requirements
Lenders have specific requirements for land + construction combo loans. Understanding these criteria helps you prepare a stronger application.
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Credit Score Requirements
Most lenders require minimum credit scores of 680 for land + construction loans, with scores of 700+ qualifying for better rates and terms. If your score is below 680, consider spending 6-12 months improving it before applying. Pay down existing debts, correct any credit report errors, and avoid opening new accounts.
Income and Employment Verification
Lenders verify income through W-2s, tax returns (usually two years), and pay stubs. Self-employed borrowers face additional scrutiny and typically need two years of tax returns showing consistent income. Employment stability matters; lenders prefer borrowers with at least two years in the same job or industry.
Down Payment and Reserves
Expect to provide 10-25% down payment on the total project cost (land plus construction). Additionally, lenders typically require cash reserves of 3-6 months of projected mortgage payments after closing. These reserves demonstrate you can handle unexpected costs or delays.
Construction Documentation
Your construction package must include:
- Detailed plans and specifications
- Itemized budget with 10-15% contingency
- Licensed contractor with proof of insurance
- Realistic timeline for completion
- Permit applications or approvals
The contractor is critical. Most lenders require licensed general contractors with verifiable track records. Owner-builder arrangements are possible but face stricter requirements and higher down payments.
Costs and Fees to Expect
Land + construction loans involve several cost categories you should budget for:
Closing Costs
- Origination fees: 0.5-1.5% of loan amount
- Appraisal fees: $500-$1,500 depending on complexity
- Title insurance and search: $1,000-$3,000
- Survey costs: $500-$1,500
- Recording fees and taxes: Varies by location
- Attorney fees: $500-$1,500
Total closing costs typically run 2-5% of the loan amount, so budget accordingly.
Construction Phase Costs
- Interest-only payments: On funds disbursed during construction
- Inspection fees: $100-$300 per draw (often 4-6 draws during construction)
- Permit fees: Varies by jurisdiction
- Utility connection fees: Can be significant for undeveloped land
Contingency Budget
Always include 10-15% contingency in your construction budget for unexpected costs. Material prices fluctuate, change orders happen, and surprises are common in construction. Running out of money before completion is the worst-case scenario, potentially leaving you with an unfinished project and a loan in default.
Using Our Calculator to Plan Your Project
Before applying for financing, use our commercial mortgage calculator to estimate your potential payments at different loan amounts and interest rates. This helps you understand:
- Monthly carrying costs during construction (interest-only phase)
- Permanent mortgage payments after conversion
- How different down payments affect your loan amount
- Total project affordability based on your income
Running multiple scenarios with different assumptions gives you a realistic picture of what you can afford and helps set appropriate expectations before you start shopping for land.
Working with Clear House Lending
At Clear House Lending, we understand that purchasing land and building requires specialized financing expertise. Our team has extensive experience structuring land + construction combo loans for:
- Custom home builders creating their dream primary residence
- Investors developing rental properties or spec homes
- Developers executing horizontal and vertical construction projects
- Business owners building commercial facilities on purchased land
We work with a network of lenders offering competitive rates and flexible terms, matching your project with the right financing solution. Whether you need a simple owner-occupied construction loan or complex commercial development financing, we can help.
Our Process Advantage
- Expert guidance from loan officers who understand construction lending
- Streamlined applications with clear documentation checklists
- Proactive communication throughout the approval and draw process
- Competitive rates through our extensive lender relationships
Frequently Asked Questions
Can I buy land and get a construction loan at the same time?
Yes, land + construction combo loans are specifically designed for this purpose. You close on the land purchase and construction financing simultaneously, with the loan funding the land acquisition first and then releasing construction draws as building progresses.
How much down payment do I need for a land + construction loan?
Typical down payments range from 10-25% of the total project cost (land plus construction budget). The exact amount depends on your credit profile, the property type, and the lender's requirements. Stronger borrowers may qualify with lower down payments.
What credit score do I need for a construction loan without owning land?
Most lenders require minimum credit scores of 680 for land + construction loans, with 700+ scores qualifying for better rates and terms. Some lenders may work with lower scores if you have compensating factors like larger down payments or significant reserves.
How long does it take to close a land + construction loan?
Expect 45-60 days from complete application to closing, longer than standard mortgages due to construction plan reviews, contractor verification, and as-completed appraisals. Having all documentation prepared in advance helps expedite the process.
Can I be my own contractor on a land + construction loan?
Some lenders allow owner-builder arrangements, but typically require construction experience, higher down payments (25-35%), detailed plans, and strong financial profiles. Many lenders prefer or require licensed general contractors to reduce completion risk.
What happens if construction costs more than expected?
If costs exceed your loan amount, you'll need to provide additional cash to complete the project. This is why budgets should include 10-15% contingency and why accurate cost estimation before closing is critical. Running out of funds during construction can result in project delays or loan default.
Take the Next Step
Buying land and building when you don't currently own property is absolutely achievable with the right financing partner. Land + construction combo loans provide a streamlined path from finding the perfect lot to moving into your completed home or building.
The key is preparation: get pre-approved first, understand the requirements, assemble detailed construction plans, and budget realistically for all costs including contingency.
Ready to explore your options? Contact Clear House Lending to discuss your project and get pre-approved for land + construction financing. Our experienced team will help you understand your budget, navigate the process, and secure the funding you need.
Already have land under contract and construction plans ready? Apply for financing today and take the first step toward building on your new property.