How the construction loan down payment works on land you own

Estimated reading time: 6 minutes

Consider a single family build. You own the lot free and clear at a basis of $250,000. Your budget for hard and soft costs is $750,000. Total project cost is therefore $1,000,000. The finished home should appraise near $1,400,000.

Run test one. Ninety percent of $1,000,000 is $900,000.

Now run test two. Seventy five percent of $1,400,000 is $1,050,000.

The lower number controls, so your loan caps at $900,000. Your required contribution is the other $100,000 of project cost.

Your land equity is $250,000. Consequently, you have already contributed more than the deal requires. The lender funds the $750,000 budget through draws and sets initial funding at zero.

In that structure the lot is the entire construction loan down payment. No cash changes hands beyond fees.

Buying land and building in one closing

Now assume you are purchasing the same lot for $250,000. Land and construction close together.

The math holds. Your loan still caps at $900,000. Of that, $750,000 stays reserved for construction draws. That leaves $150,000 as initial funding toward the purchase.

So you bring $100,000 to the table, plus closing costs. Either way, lenders measure the construction loan down payment against total project cost, not against the land price alone.

Simultaneous closings are routine with private lenders. Banks rarely offer them. If a lender tells you to buy the land first and return with 15 to 20 percent cash, that is their policy speaking, not an industry rule.

When the value test raises your construction loan down payment

Change one input. Suppose comparable sales support $1,150,000 instead of $1,400,000.

Seventy five percent of $1,150,000 is $862,500. That now falls below the $900,000 cost ceiling, so your loan drops to $862,500.

As a result, your construction loan down payment climbs by $37,500. Nothing about your land changed. Your budget did not change either. The market moved instead.

This is why building well above the neighborhood price point creates financing risk. A project can pencil on paper and still fall short at the value test.

Which land value your lender uses

Two lenders can view the same lot and reach different conclusions. Ask directly which figure they use.

Some credit your purchase price, especially on a recent acquisition. Others credit appraised value. That distinction matters most if you bought raw ground years ago and carried it through entitlement.

For example, a lot bought at $120,000 may appraise at $250,000 once entitled and shovel ready. The higher figure can erase the construction loan down payment entirely. In other words, the entitlement work you already paid for becomes spendable equity.

Also ask how they value the finished home. Many private lenders skip the appraisal and use an in house valuation instead. The trade buys real speed. Still, it means the second ceiling rests on their opinion of value, so get that opinion in writing first.

Land that will not carry a build yet

Not every parcel supports a construction loan on day one. Raw ground without entitlements is a different risk, and lenders price it that way.

Unentitled land typically draws leverage of 50 percent or less, if a lender will touch it at all. Permits, utilities, and an approved site plan move a parcel from speculative to financeable.

Therefore, sequence matters. Carrying a lot through entitlement first, then financing the vertical build, often costs less than trying to fund both at once. Our guide on when to use a bridge loan covers the interim options.

Cash you still need beyond the construction loan down payment

A zero down structure is not a zero cash structure. Borrowers get surprised here more than anywhere else.

Points, a document fee, title, and escrow all come due at closing. Lenders also require title, liability, and builder’s risk coverage on the property.

None of that counts toward the construction loan down payment, so budget for it separately. Our guide on how to read a private lender term sheet shows where these charges usually hide, and private money loan rates in California breaks down what the pricing actually buys.

Draws add a second cash need. Construction funds arrive after the work, not before. You pay the framing package first, submit receipts and photos, then receive funds a few business days later. Consequently, you need working capital to float about one draw cycle at all times.

How experience changes the construction loan down payment

Leverage tracks track record, so the headline number rarely applies to everyone.

A builder with completed projects, and title history on those projects, can expect to contribute close to 10 percent of total cost. A first time builder should plan nearer 15 percent. Some programs let the general contractor carry the experience instead, and you can verify any California contractor license before you rely on it.

In short, your construction loan down payment reflects your track record as much as your lot. We covered how lenders define that record in construction loans for contractors.

The draw clause every builder should read

Read the draw terms before you read the rate. Nearly every construction loan lets the lender reduce or pause a draw. The trigger is simple. Remaining funds must still cover the remaining scope.

That provision is reasonable, and we would not lend without it. Still, it sits behind almost every draw dispute we see. A builder overspends early on framing, then discovers the shortfall at drywall. Protect yourself by tracking your budget line by line from the first draw, not the fifth.

Five questions to ask before you sign

Ask which value they assign your land, purchase price or appraised value. Then find out whether they will close land and construction together. Third, get the draw fee in dollars, because unlimited draws sound generous until every one carries a charge.

Confirm how many business days pass between a complete submission and funded money. Finally, ask whether the loan is Dutch or non Dutch, since that single answer can move your carrying cost by tens of thousands over an eighteen month build. Our private money loans FAQ explains the difference.

A lender who answers all five plainly is showing you how they will behave later. A lender who hedges is telling you something too.

Where we land on it

Land equity is real equity. A builder who owns ground should rarely fund a second construction loan down payment in cash.

What the land is worth to your loan depends on three things. The two ceilings come first. The valuation method comes second. Your track record comes third.

If your exit is to hold and rent the finished home, read how to qualify for a DSCR loan now rather than later. If the project involves an existing structure instead, start with bridge loan vs hard money loan in California.

Otherwise, send us the parcel, the budget, and the comps. We will run both tests and give you the number, including the version where the answer is no.

Mayacamas Lending Inc. | CA DRE #02306252 | Santa Rosa, California. Loans are for business purposes only. Terms vary by project, borrower profile, and market conditions.