Using land equity with a construction loan.

Land equity refers to the value of the land you already own outright, the money you previously put down on the purchase of the land and/or the appreciation of the land since you purchased it. Land equity can be used in lieu of a cash down payment and may also allow you to roll in your closing costs and prepaids into your loan. By doing this it is possible to close on your construction loan without having to bring any cash to closing, paying less in mortgage insurance or not having to pay any mortgage insurance.

 Here's the process:

1. Assess the Value of Your Land: The first step is to determine the current market value of your land. You can estimate this by researching recent sales of similar properties in your area. Ultimately the appraiser will set this value when you apply for your loan.
2. Calculate Your Equity: Once you have the value of your land, subtract any remaining mortgage or liens against it to calculate your equity. This is the amount you can potentially use in lieu of cash on your construction loan.
3. Contact a Construction Lender: Most Mortgage Loan Officers have never closed on a construction loan. Make sure you are working with an MLO that has closed multiple Construction loans in the past. A good one will ask a lot of questions about your land, the kind of home you are building, your income and your credit. At the end of the process they should offer you a Pre-Approval that you can give to your builder. 
4. Loan Application: Once you have a Contract to Build from your builder you can submit your loan application along with all necessary documents, including a signed copy of the Settlement Statement from the closing on the land, a survey of the land, and an explanation of any existing mortgages or liens on the property.
5. Appraisal and Approval: The lender will likely require an appraisal of both the land and the proposed construction project. This is a critical step in the process. 
6. Closing: Once the loan is approved, and all conditions have been cleared, you can close. If there are any existing mortgages on the land that loan will be paid off at the closing. The funds to build the home will be disbursed according to the terms of the loan agreement. 

I hope this explanation helps. If you have more questions please visit my website, bestfhaconstructionloan.com (I also do Conventional and VA Construction loans) or call me at 586-917-5534.