Land Loan vs. Construction Loan: Key Differences & What to Expect on LTV
When you’re financing real estate, the first decision is often: “Should I start with a land loan, or go straight to a construction loan?” While both help you acquire property, they serve very different purposes—and lenders treat them quite differently. Below, I break down the core distinctions and typical Loan-to-Value ratios (LTVs) you can expect from each.
🏞️ 1. What Is a Land Loan?
- Purpose: Purchase raw or unimproved land, or property with minimal infrastructure.
- Draw Structure: Funds are disbursed in one lump sum at closing.
- Risk Profile: Highest risk category—no structures exist yet, value can be volatile.
- Collateral: The land itself (often unencumbered) plus any personal guarantees or additional assets you can offer.
🔑 Typical LTV for Land Loans
- 50–65% LTV in most markets
- Up to 70% LTV in strong, proven development corridors (with deep pocket borrowers)
- Why lower? Lenders demand more “skin in the game” because raw land can sit undeveloped and lose value.
🏗️ 2. What Is a Construction Loan?
- Purpose: Finance the hard and soft costs of actually building once land is secured.
- Draw Structure: Funds released in multiple “draws” or “progress payments” tied to project milestones (foundation, framing, drywall, completion).
- Risk Profile: Medium risk—value is being created, but construction delays or cost overruns can derail the project.
- Collateral: Usually a first-priority mortgage on the property, plus ongoing inspections to confirm progress before each draw.
🔑 Typical LTV for Construction Loans
- 65–75% LTC (Loan-to-Cost) – based on total projected costs
- 70–80% LTV of the “as-completed” appraisal value
- Why higher? The property is being improved, reducing risk as new value accrues.
🔄 3. When & Why You Might Use Both
- Sequential Approach
- Step 1: Land Loan to acquire the raw parcel.
- Step 2: Construction Loan (or “construction-to-permanent”) refinances the land loan once permits are in hand and work begins.
- Construction-Only (Land Owned Free & Clear)
- If you already own the land outright, you can skip the land loan and leverage the land’s full equity for a construction loan (potentially up to 80% LTV).
- Cash-Out Refinance
- Post-construction, some borrowers refinance into a long-term mortgage to pay off their construction debt and lock in a lower, permanent rate.
✏️ Tips for Borrowers
- Build Strong Equity: The more you can bring in as down payment, the better your leverage.
- Organize Your Docs: Lenders need site plans, budgets, builder resumes, permits, and pro forma appraisals to underwrite.
- Plan Your Draw Schedule: Work closely with your builder to define clear milestones—lender inspections hinge on them.
- Shop Around: Different lenders have varying appetite for land vs. construction risk; regional banks, credit unions, and private lenders may offer better terms.
About The Coterie Group
We’re commercial finance brokers specializing in land, construction, and bridge loans across North America and Europe. With deep lender relationships and in-house legal partners, we guide you from term sheet to closing. Ready to explore your financing options? Let’s connect!
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