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Dear Dr. Don,
I am currently having a home built on a lot that I own. I have an interim loan and will need to get permanent
financing when the project is complete.
Can the equity in the lot be used as a down payment on the permanent mortgage?
-- Bungalow Brooke
Dear Brooke,
When construction is finished you will move from a construction loan to permanent financing. The appraised value
of the home will include the value of the improved land.
The loan-to-value of the mortgage loan is based on this appraised value, so the equity in the lot
will contribute toward your equity stake in the home. It's not a down payment, because it's not cash, but it is equity.
If you have at least 20 percent equity in the home, you won't need private mortgage insurance. Depending
on the appraisal, and your equity position, you may need to contribute additional cash as a down payment to have an
80 percent loan-to-value.
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