Yes, construction loans generally do include land. You can either roll the lot purchase into the same loan that funds the build, or, if you already own the property, apply the equity in that land toward your down payment. Which path fits depends on the loan program: FHA one-time close loans require as little as 3.5% down and let existing land equity satisfy it, VA construction loans can finance both land and building with zero down for eligible borrowers, and conventional lenders usually want between 5% and 20% down.
Rolling the Lot Purchase Into the Loan
Lenders routinely bundle the land price with projected labor and material costs into one construction loan. The appraisal is based on the future value of the completed home rather than what the raw land is worth today, and Federal Reserve supervisory guidance confirms that appraisals for these loans should reflect “market value upon completion of construction.”1Board of Governors of the Federal Reserve System. FAQs on the Calculation of Loan-To-Value Ratio for Residential Tract Development Lending A $100,000 lot with a $300,000 build budget gets evaluated as a $400,000 project, and the loan-to-value ratio is measured against that finished value.
To start, you need a signed purchase agreement for the lot so the lender can order an appraisal of both the raw land and the planned improvements. Combining land and construction into one transaction consolidates closing costs and avoids managing two loans with different rates and payment schedules.
During construction, you pay interest only on the funds that have actually been disbursed, not the full loan amount. If the lender has released $120,000 of a $400,000 loan, you owe interest on $120,000.2Bankrate. What Are Construction Loans? Once the home is finished and the loan converts to a permanent mortgage, you begin making standard principal-and-interest payments.
Fannie Mae supports two structures for construction-to-permanent financing: a single-closing transaction that wraps land, construction, and permanent mortgage into one closing with one set of fees, or a two-closing transaction that lets you shop for a permanent rate separately at the cost of paying closing costs twice.3Fannie Mae. Construction-to-Permanent Financing Freddie Mac offers a comparable construction-to-permanent product.4Freddie Mac Single-Family. Construction to Permanent Mortgages
Using Land You Already Own as Your Down Payment
If you hold title to a lot, that ownership stake can serve as your down payment. The lender orders a professional appraisal to establish the land’s current fair market value, subtracts any outstanding liens, and treats the remaining equity as your cash contribution. A lot appraised at $150,000 with no debt against it gives you $150,000 in equity, which on a $500,000 total project comfortably clears the 20% threshold needed to skip private mortgage insurance on a conventional loan.
If money is still owed on the land, the construction loan typically pays off that balance first so the new lender holds the primary lien position. Fannie Mae’s guidelines require a clear first-lien position before it will purchase the loan.5Fannie Mae. Conversion of Construction-to-Permanent Financing: Single-Closing Transactions Whatever equity remains after the payoff is credited toward your down payment, reducing the amount you need to finance.
How Each Loan Program Treats Land
Down payment rules and eligibility vary by program, and picking the right one can save tens of thousands of dollars upfront.
Conventional Construction Loans
Conventional lenders generally require 5% to 20% down. Twenty percent down avoids private mortgage insurance. Credit score requirements are stricter than for government-backed options, and interest rates during the construction phase typically run higher than standard mortgage rates. The Fannie Mae eligibility matrix allows LTV ratios up to 97% on certain construction-to-permanent purchase transactions for a primary residence with a fixed-rate mortgage, though individual lenders often set tighter limits.6Fannie Mae. Eligibility Matrix
FHA One-Time Close Loans
FHA one-time close loans finance the lot purchase, the construction phase, and the permanent mortgage in a single transaction, with a down payment as low as 3.5%. If you already own the land, your equity can cover that 3.5% requirement entirely. FHA loans are more forgiving on credit scores than conventional options, which makes them useful for borrowers who have land but limited cash reserves. The trade-off is mandatory mortgage insurance premiums regardless of equity.
VA Construction Loans
Eligible veterans and active-duty service members can finance both land and construction with a VA one-time close loan, often with zero down payment. The land must be for a primary residence, construction must begin promptly under a signed building contract, and the completed home must meet VA minimum property requirements. Utilities and road access must be available on the lot. Fewer lenders offer VA construction loans, so availability is the main obstacle.
USDA Construction Loans
For properties in eligible rural areas, USDA single-close construction loans can include land purchase costs. These loans target low- to moderate-income borrowers, defined as households earning up to 115% of the area median income.7eCFR. Part 3555 Subpart C – Loan Requirements Eligible costs include site preparation like grading and foundation work, plus utility connections for water, sewer, electricity, and gas. Closing must occur before construction begins, and the lender disburses funds for the land cost first, holding the remaining balance in escrow for construction draws.
Down Payment, LTV, and the Contingency Reserve
Construction lenders evaluate two ratios. The loan-to-value ratio compares the loan amount to the appraised value of the finished home. The loan-to-cost ratio compares the loan amount to the actual project costs, including land, materials, labor, and soft costs. Both must fall within lender limits. Federal banking regulators set supervisory LTV ceilings at 85% for one-to-four-family residential construction and 65% for raw land, though these are regulatory guardrails rather than what every borrower experiences.1Board of Governors of the Federal Reserve System. FAQs on the Calculation of Loan-To-Value Ratio for Residential Tract Development Lending
Most lenders also require a contingency reserve of 5% to 10% of the total project budget to absorb cost overruns, material price spikes, or design changes. The reserve is built into the loan amount but sits untouched unless problems arise. Any unused portion reduces your final loan balance when construction ends. Underestimating this cushion is one of the fastest ways to run into trouble mid-build.
The Timeline Pressure You Need to Plan For
Construction loans have short fuses. For single-closing construction-to-permanent loans sold to Fannie Mae, no single construction period can exceed 12 months and the total construction phase cannot exceed 18 months. Fannie Mae does not grant exceptions.5Fannie Mae. Conversion of Construction-to-Permanent Financing: Single-Closing Transactions If your build runs past these deadlines, the lender must restructure the loan as a two-closing transaction, which means additional closing costs and potentially different terms.
The bigger danger is a maturity default: the build isn’t finished or permanent financing isn’t in place when the construction loan comes due. FDIC research shows that loans for projects earlier in the development cycle, particularly land acquisition and lot development, carry significantly higher loss rates than loans for buildings further along in construction.8Federal Deposit Insurance Corporation. Determinants of Losses on Construction Loans Many lenders require personal guarantees on construction loans as a result. If the partially built property doesn’t cover the debt at foreclosure, the lender can pursue your other assets.
A lender facing a maturity default would generally rather negotiate than foreclose on a half-built house. Expect to pay an extension fee and a higher interest rate for any additional time, and the lender may demand added equity to reduce its exposure. Padding your timeline with the contractor by a few months is far cheaper than negotiating an extension under pressure.
When a Standalone Land Loan Makes More Sense
If you want to buy land now but aren’t ready to build, a standalone land loan is the other route. These are separate from construction loans and come with steeper terms. Raw, undeveloped land typically requires 30% to 50% down with higher interest rates, because the lender has no structure as collateral. Improved land with utilities and road access might qualify for 10% to 20% down at somewhat better rates. Land loan terms usually run 5 to 15 years with full principal-and-interest payments from day one, unlike the interest-only construction phase of a build loan.
The question is timing. If you plan to build within the next year or two, rolling the lot into a construction loan saves you a closing, avoids the higher land-loan rates, and lets you use a single appraisal based on the finished home’s value. If your construction timeline is uncertain, a land loan keeps your options open without the pressure of a 12-to-18-month construction clock. When you eventually pursue a construction loan, you will need to either pay off the land loan from the construction proceeds or confirm the land lender will subordinate its lien to the new construction lender.