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 include 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 land comparables, in addition to the standard 3 comparables needed to establish the after completion value of your home.
Let’s look at the two ways calculate equity:
Scenario 2 gains $15,000 in additional equity by using the market value. This can mean the difference between bring cash to close or $0 down.
