Land Loans and Construction Financing: How to Buy Land and Build on It

Buying raw land or a lot and building a home on it is a two-phase financing process. The land acquisition and the construction are typically funded differently — and planning both phases together from the start prevents costly complications later.

Phase 1: The Land Loan

Land loans are significantly more difficult to obtain than standard residential mortgages. Raw land has no improvements, no income, and no readily comparable market — making it riskier for lenders.

Types of land matter: Raw or unimproved land — no utilities, no access road — is the hardest to finance and may require 30 to 50% down with higher rates. Improved lots with utilities, road access, and possibly permits attached are more financeable. Residential lots in platted subdivisions with utilities and a builder-ready designation are the easiest to finance, often available with 20 to 25% down through portfolio lenders.

Land loan terms are typically shorter than standard mortgages — 5 to 15 years — with higher rates. Many buyers use a portfolio lender or a local community bank with local market knowledge for land financing.

Phase 2: Construction Financing

Construction loans fund the building phase through draw disbursements tied to construction milestones. Options: a standalone construction loan that is then replaced by a permanent mortgage at completion, or a one-time-close construction-to-permanent loan that combines both into a single closing with automatic conversion to a permanent mortgage when construction is complete.

The one-time-close approach is typically preferred — one set of closing costs, one rate lock, and no uncertainty about permanent financing at completion.

Integrating Land and Construction

If you already own the land, its equity can often serve as the down payment for the construction loan. Lenders evaluate the combined value of land plus completed improvements — and if existing land equity covers the down payment requirement, minimal additional cash out of pocket may be needed.

At East Coast Mortgage, we structure construction-to-permanent financing for buyers building on their own lots or acquiring land as part of a combined transaction. Book a call to discuss your project.