Construction & Renovation
Construction Loan Down Payment and Loan to Value
How construction lenders set the down payment using loan to value and loan to cost, how owned land counts as equity, and how occupancy changes the limits.
Updated 2026-08-21| Applies to: Borrowers planning the cash needed to close a construction loan.
The short answer
Construction lenders look at two ratios: loan to value against the appraised value of the finished home, and loan to cost against the total project budget. Your required cash is driven by whichever ratio is more restrictive. Land you already own counts toward equity, which is why many builders come to closing with little or no additional cash.
Two ratios, one answer
- Loan to value: loan amount divided by the appraised value of the completed home
- Loan to cost: loan amount divided by the total project cost, which includes land, hard costs and soft costs
If the finished appraisal comes in above cost, loan to cost usually controls. If cost runs above the appraisal, loan to value controls and you cover the gap.
A simplified example
| Item | Amount |
|---|---|
| Lot value, owned free and clear | $70,000 |
| Build cost | $430,000 |
| Total project cost | $500,000 |
| Appraised value when complete | $520,000 |
| Loan at a program maximum | Set by the lower of the two ratio tests |
| Equity credit from the lot | $70,000 applied toward the requirement |
Numbers are illustrative only. Actual limits, ratios and cash requirements come from the specific program and your approval.
Occupancy matters
Owner occupied builds carry the most favorable limits. Second home builds are tighter. Investment property construction is tighter still, with a maximum loan to value on One Time Close Construction of 75% for investment occupancy.
Cash you need beyond the down payment
- Closing costs and prepaid items
- Contingency reserve for change orders and allowance overages
- Interest carried during the build if it is not financed
- Reserves the program requires after closing
General education, not a commitment to lend. Construction, land and renovation program terms, loan to value limits, draw procedures and builder requirements vary by lender, property and current guidelines, and they change over time. Manny Oloyede | Mortgage Broker | NMLS 1824463 | Ultimate Mortgage Brokers LLC. Equal Housing Opportunity.
Common mistakes to avoid
- Planning cash only against the down payment percentage and forgetting contingency
- Counting a lot at its purchase price rather than its appraised value
- Assuming investment builds price and qualify like owner occupied builds
Related loan programs
Frequently Asked Questions
People also ask
Do I make payments during construction?
On most one time close programs you pay interest only on the funds drawn to date, then the full payment begins after conversion.
Read: One Time Close Construction LoansDo I close twice?
Not with a one time close construction to permanent loan. You close once, and the loan converts at completion. A two time close structure has a separate construction loan and a separate permanent refinance, with two sets of closing costs.
Read: Construction to Permanent Loans ExplainedWhich is cheaper overall?
Usually the one time close, because you pay closing costs and title work once instead of twice. The exact difference depends on loan size and the fees on each structure.
Read: One Time Close vs Two Time Close Construction LoansHow long does a draw take to fund?
Commonly a few business days from request to funding once the inspection is scheduled and lien waivers are in. Timelines are not guaranteed and depend on the inspector and title company.
Read: How Construction Loan Draws WorkHow much should my contingency be?
Many builders and lenders plan a contingency in the range of five to ten percent of hard costs. Larger custom projects and older lots with unknown site conditions justify the higher end.
Read: How to Finance a Custom Home BuildCan I use land equity as my down payment?
Often yes. Land owned free and clear commonly counts toward equity in the construction project, subject to program rules and the appraised lot value.
Read: Land Loans vs Construction LoansTerms used in this guide
- Loan to Value
- The loan amount divided by the property value. A $200,000 loan on a $250,000 home is an 80% LTV.
- Down Payment
- The portion of the purchase price you pay from your own funds or eligible gift funds rather than borrowing.
- Equity
- The difference between what your home is worth and what you still owe on loans secured by it.
- Cash to Close
- The total funds you must bring to closing: down payment plus closing costs and prepaids, minus credits and your earnest money deposit.
Written by
Manny Oloyede, Mortgage Broker
NMLS #1824463 | Ultimate Mortgage Brokers LLC NMLS #2619461 | Licensed in OH | KY | NC | PA | SC | TN | TX
I have worked in mortgage lending since 2018 out of the Akron / Cuyahoga Falls Branch, helping buyers, homeowners and investors across Northeast Ohio and every state where I am licensed. These guides reflect the questions I answer most often, written the way I would explain them on a call.
Keep reading
Construction to Permanent Loans Explained
How a construction to permanent loan works: the build phase, interest only draw payments, inspections and the conversion to a standard mortgage at completion.
Construction & RenovationHow Construction Loan Appraisals Work
How an appraiser values a home that has not been built, what plans and specs must include, what happens if value comes in low, and the final inspection at completion.
Construction & RenovationOne Time Close vs Two Time Close Construction Loans
Compare one time close and two time close construction financing: closing costs, rate risk, requalification at completion and which structure fits which builder.
Construction & RenovationCost Overruns and Change Orders on a Construction Loan
How change orders are approved on a construction loan, who pays for overages, how contingency reserves work and what to do when the budget runs past the loan.
Questions about your own numbers?
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