How to calculate your Land Equity for a Construction Loan

Mortgage and Lending with Cranbrook Loans NMLS #134090

Land equity comes in three forms;

*First, gifted land- A family member has offed to gift you land, or they sold it to you at a greatly reduced price, and you have accepted their generous offer. Congratulations, you now have equity in your project! How much equity will depend on the appraised value of your land and the value of your project. Take a look at what other similar parcels have sold for in the last year. Only count the usable lane. A ten acre parcel that has 9 acres of swamp is really a 1 acre parcel, just as an example.

*Second, you put money down on land less than six months ago. Perhaps you purchased the land with 100% cash, made a down payment and have a land loan, or made a down payment on a land contract. In any of these scenarios the funds you invested in the property count as if you brought them to closing. This assumes that the project appraises for the dollars you have in it and the land appraises for the purchase price.

*Lastly, you put money down on the land more than six months ago. The same rules as above apply but now you can get credit for any appreciation the land may have experienced. Again, take a close look at what similar lots have sold for in the last year.  

In all of these situations your land equity can count towards your required down payment and closing costs. This may allow you to close on the loan without bringing any funds to closing.  

As I have mentioned, the value of your land will be set by the appraiser. They will take a close look at what similar properties sold for, in your area, in the last year. Keep in mind that the value of your property is not based solely on the size of the lot. Road frontage, usable area, soil conditions and the ability to hook up to city water and sewer systems all play a role in land value.

There is a limit to the value you get for land equity! The appraiser will not give you credit for any "excess" land. Every home comes with some land. The amount of land that is standard and customary depends on where you are building. In metropolitan areas lots over an acre or so would be considered to have excess land. As you move out of a metro area and into "bedroom" communities it is not uncommon for homes to be on one to five acres of land. Finally, if you move completely out of a metro area into what would be consider a rural area it would not be out of the norm to see homes on ten acres of land or more. 

Ultimately when your appraisal on the proposed project is done the appraiser will review the sale comps they used and the lot sizes they are on. As an example, if the sale comps are on 1-3 acre parcels, and you have a 10 acre parcel, the appraiser will only give you credit for 3 acres or so. The theory here is that most buyers in this area are only looking for, and will to pay for, 1-3 acre parcels.

Here's a great article you can review from the Appraisal Institute on this subject,

For more info visit my website at or call me at 586-917-5534. I'd be happy to discuss your project.

Comments (3)

Sham Reddy CRS
Howard Hanna RE Services, Dayton, OH - Dayton, OH

Thanks for sharing!!!

Land equity comes in three forms. First, if you have your land gifted to you. Second, if you put little to no money down on land over a year ago and it has appreciated. Last, if you made a cash down payment on land within the last year, you will be credited that dollar amount at closing.

Mar 27, 2018 04:33 AM
William Feela
Realtor, Whispering Pines Realty 651-674-5999 No.

Equity is equity.   I have many clients by land and build later and use the land value as their down    payment

Mar 27, 2018 08:13 AM
Elizabeth Bouchard
Samson Properties - Arlington, VA
Associate Broker in Northern Virginia, DC and MD

Land is so scarce in our area (DC Metro) that many homeowners are tearing their old homes down and building new.  The land is valuable enough that even without the house on it, they have enough equity to avoid putting up any down payment for their construction loan.

Mar 12, 2019 11:57 AM