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I really don't understand this. Let's say I have a land worth of $30k. I want to build a house for $60k. The bank will use $30k as a downpayment from my land value and give me $60k to build a house and I will end up paying $30k mortgage. If I decide to pay off my mortgage right away, the bank will lose $30k. Am I missing something?

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    How do you mean "The bank will take $30k as a downpayment from my land value" Are you giving them the land? I'm betting they are using the land as collateral and you still owe the full $60K. If you don't pay them back they will take the land or put a lien on it. – JohnFx Mar 22 '15 at 0:06
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    They won't lend you $60k to build the house you're going to use as collateral. The collateral has to exist before they give the loan. If they used the nonexistent house as collateral you could just keep the $60k without even attempting to pay anything back and they would get nothing. – BrenBarn Mar 22 '15 at 0:53
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    @BrenBarn, they do, it's called self build mortgages moneysupermarket.com/mortgages/self-build – Grasper Mar 22 '15 at 0:59
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    @Grasper: That would depend on the terms of the mortgage. I would guess that the lender would not agree to a loan that did not allow them to take the land if you fail to pay the mortgage. – BrenBarn Mar 22 '15 at 2:44
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    Many descriptions of the foreclosure process are posted on line, especially after the US bubble burst. In general what happens is that the land and house get sold for best offer within a limited time, the bank gets what you owe them, and you get whatever's left over. – keshlam Mar 22 '15 at 21:05
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(Before) You start by owning land worth $30K.

(After) You end owning a house on that land, and owe the bank $60K for a house+land worth $90K or more, hopefully.

The bank now views this as you having 66% loan to value, or as if you put 33% down payment.

Yes, if you default, you run the risk of losing the land. You'll get some money back, but foreclosed properties often sell for well below the fair value.

  • so it is better not owning a land when getting mortgage to build a house. – Grasper Mar 23 '15 at 17:24
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    No. It's just a different conversation you need to have with the bank. The process involves a construction loan, while a normal purchase is one simpler loan. – JoeTaxpayer Mar 23 '15 at 20:48
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    It's the same as if you owned $30K and no land. The bank would give you a $60k loan to pay for the land and the house since you have $30k yourself, but the bank would have a mortgage for the land and the house. That's why the bank is willing to give you money: Because your land worth $30k, or your $30k cash, make it unlikely that your home loses so much in value that the bank won't get its money back. – gnasher729 May 30 '16 at 11:48
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The house is called an improvement on the land. The house should improve the value of the 30k parcel by 60k. So they're more than happy to lend you 30k.

However, the second 30k to finish the house will probably require many small extensions of the loan as you show progress in completing the construction.

Also, don't be surprised if they require you to show your stamped (by a licensed architect) drawings including, also stamped, electrical and plumbing plans. Oh, and don't forget the zoning clearances and building permits. At some point, you'll have to show all that. Definitely before they lend you anything beyond the value of the land, possibly sooner.

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    For the downvoters, it's obvious that you disagree with my post for some reason, and that's fine. Just be sure to research the pitfalls of building your own home. It's a lot more than 'Buy a plot and build on it.' – Xalorous Aug 26 '16 at 17:47

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