kate what will you do if the house costs more than the cash you have? having a small loan would allow you to finish the project without any delays (if you find out during the build that you need more money - you might have to stop or slow down the build while the loan is being processed.) Even if you got a bank loan, you wouldn't have to draw on the bank money until you needed it. And there might be a tax advantage to having a small mortgage - even if you really don't need one to finance the build - check with a tax accountant. I also like the idea of having some cash reserves on hand after you are done - cash is king. There are a lot of things you will want for your new home, and having cash to pay for it - rather than borrow it on a credit card - is a less costly way to go. Think about it - the bank money is relatively cheap money (say 5.75 to 7%) while credit cards charge 2 to 3 times that or more. If you have more than enough cash, and you don't want a mortgage, then you can forget the bank. You would eliminate all of the closing costs and fees which can be significant. Nothing wrong with this approach. If you do choose to borrow some money, the inspections that the bank does for approval of draw payments are not detailed and typically do not check quality. You can hire your own home inspector if you want an independent check on the quality of the work. If you self finance - then having your own home inspector is a must. best of luck with your project.

Kelly When you say "We are in contract on the lot" - with whom? Is it an independent seller of the land or with a builder? if with a builder - what type (custom home builder or large residential builder like Toll Brothers)? These answers are needed to better help you out. If you put a contract on a lot with an independent seller of the land - then don't do a seperate land & construction loan. Simply wait until your current house sells and buy the land with that money. I will explain why in a minute. If you are buying through a custom builder who owns the lot, then don't do a land loan either. If you are buying through a large residential builder, the land and house are bundled together in the purchase price and the mortgage loan you get will cover both land & house. Only 1 loan is needed - and you don't close on that loan until the house is done. Getting a loan on bare land with no house on it is expensive (higher interest rates and harder to qualify ) because it is a bigger risk to a bank. It is usually harder to sell bare land than one with a house it (exceptions to this rule are in places like Malibu, CA). Why pay points, loan origination fees, and closing costs on a seperate land loan that you can purchase with cash? Typically when you apply for a construction loan, the land value is included as part of the estimated value of the house/land when it is complete. This is important because that total value will be used to calculate how much money you can borrow. Let's say your land is worth $50K (and you own it out right with no loan) and the house when complete is worth $350K (the appraised value) - then the total appraised value of the property when completed would be $400K. If you put 25% of your own money (the land value and your planned cash into the house is included) into the construction project, then the bank will let you borrow $300K for the house project assuming you qualify for that payment. Note that the appraised value of the house IS NOT the contract price for the new house. The construction loan can be seperate from the mortage BUT I would not recommend you go that route. There are banks who offer construction loans that will convert into the mortgage when the house is done. You close once on the construction loan (pay points & loan origination fee + closing costs) at the start, then you convert at the end and pay no other CLOSING costs. BUT watch out for this, at the end when you convert you will have to pay up to 6 months of estimated future taxes & insurance to seed the escrow account for your new mortgage loan so you will need to bring money to the table when you convert at the end (these aren't CLOSING costs per se but it is money out of your pocket). But at least you only pay closing costs and loan orgination fees once instead of twice. The way the construction loan works is basically like a line of credit. You only pay on the loan amount as you draw from the line of credit - and multiple draws occur as the house is built (5 to 7 draws are typical). These draws are tied to completed stages of the house like plans complete & permits approved, foundation complete, framing & roof complete, rough in plumbing/electrical/HVAC complete, drwall complete, painting complete, final finishes complete, etc. So during the construction process - your monthly payment on the construction loan will incrementally increase as draws are paid out to the builder. That is why I suggest that you use as much of your own cash to make the initial draw payments to the builder and then draw down on the construction loan as late in the process as you can. Reason is that you want to minimize your payments on the construction loan - which are essentuially just interest payments. If you are paying rent and construction loan costs at the same time you can see that minimizing the double payments for as long as you can make it easier on you financially. Example. let's say that you own that 50K piece of land and you have another $150K in cash from the sale of the house. You decide that you want to keep $50K in your pocket (to cover any possible overages - a good idea) and the other $100K to be used on the new house, and you have the $300K loan ready to go (so you have up to 400K to cover building costs on a project that should cost let's say 300K). So you start the project - you use YOUR $100K of money to pay the builder for the first 2 or 3 draws and the bank money money to cover the rest (you can also do a mixed payment where you put in some of your own money and you use some of the the bank money to cover a particular draw). So you pay the first $100K and let's say the house winds up actually costing you $325K because of a few oopses and some upgrades you decided to make. At the end, you only used $225K of bank money and $100K of your money. You only paid interest on the portions of the $225K as you paid the builder. You don't pay interest on the other $75K that you did not draw from the bank. When you convert the construction loan to the mortgage, your new mortgage will be for $225K. If you can use your money to cover the initial few payments to the builder you might not not have to make a constuction loan payment until 2 or 3 months into the build - and that is 2 or 3 months worth of payments that you keep in your pocket. In our build, we started the project in Sept 06 but did not make our first interest payment to the bank until late Spring 2007 which was nice because our house wasn't finished until Dec 2007 - 6 months late. You could do 2 seperate loans - one for land and one for house - but hopefully you get the point that you don't have to do it this way and it would cost you a lot more money (in loan fees and monthly payments) to have 2 seperate loans. I Hope this helps.

@Cpartist - Yes, a watertight habitable shell, with plumbing and electrical hook ups. I will be installing the fixtures, ie: showers, toilets, tubs, lights, etc. myself. I know how to do a lot of the interior work so I don't want to take out more money than I need and go into debt paying someone to do work I know how to do. @ B Carey - I think what I am asking for is technically called a "Shell only loan," but I am finding that term is being interpreted differently by different people. So what I am looking for is the funding to complete phases of the project, even if I want to hire subcontractors to help with some of the work. I guess I want to go into as little debt as possible. I'd be willing to do a true "owner builder" loan that is financed by the bank by taking out a larger loan and just using the contractors for the really serious portions (Foundation, electric, framing, etc), and then using the rest of the money to finance the work I want to do on my own. That would probably actually be best. I am in my 20s, I don't have a 401k. I just sold the home I did have for $525k. I have gotten approved for a personal loan already, however, (1) The bank caps their personal loans at $35k, and (2) I would prefer to take out a loan that turns into a 15 year mortgage because the interest rates are a lot lower than they are on unsecured personal loans. I purchased the land for $50k but I do not know how the bank would value the land. Can you explain the thought process behind taking out a land loan on land I already own? Thanks for the response

New bank does construction loans all the time and approved us even if the loan to value goes above the 80% as our finances are all sound. They understood contingencies, overruns, etc, and will actually be doing $600k so there’s a little bit of buffer. Spoke with the initial bank rep and bank manager today to close out the loan and they both apologized, with rep even saying they were a little worried about other things that may pop up down the road if this had already started with first disbursement - so I think we may have actually avoided a train wreck down the road.