Calculating Land Equity

If you are considering a construction loan and have purchased your land already, you may benefit from the equity accumulated over time. Most lenders will use the sales price if the transaction took place in two years or less to calculate equity. If the lender uses the purchase price your equity is calculated only by the difference between the payoff of the land vs. the purchase price. If you purchased your land 2 years ago or more lenders will automatically default to the market value listed on the appraisal.
If your land is in an area where price appreciation has been on a tear, you can request a land appraisal of the property to be included in the “subject to” appraisal of your new construction. This will increase the cost of the appraisal because the appraiser must obtain at least 3 comparable pieces of land, in addition to the standard 3 comparable pieces of land needed to establish the after completion value of your home.