Can I Use a Construction Loan to Buy Land?
Yes — but the answer is more nuanced than a simple yes deserves. How land gets financed inside a construction loan, when it makes more sense to buy the land with cash first, and what every developer needs to know about permits before they close.
How Land Financing Works Inside a Construction Loan
In the vast majority of new construction deals that Mayflower Venture Partners finances across New England, the construction loan covers two things at once: the acquisition of the land at closing, and the full construction budget disbursed in draws throughout the build. This is a single loan, a single closing, and a single relationship from the day you own the lot to the day you hand over keys to the buyer.
The way the land portion is structured within the loan is straightforward. At closing, the lender advances a portion of the purchase price — typically 25% to 50% of the land cost, depending on the deal — and the borrower brings the remainder as their down payment. The construction budget sits in a holdback that is funded in draws as milestones are completed. The borrower pays interest only on the disbursed amount throughout the project, so in the early months when only the land acquisition has been funded, the interest obligation is relatively modest.
This structure works cleanly on most deals in premium Massachusetts markets where land values are high, comparable new construction sales are available to support an exit value, and the project is buildable by right under the current zoning without requiring special permits or conservation commission approval. In those deals — which represent the majority of what we finance — the all-in-one construction loan is the most efficient and most cost-effective structure available.
The Loan-to-Cost Reality: How Much Land We Actually Fund
Understanding how much of the land purchase a private construction lender will actually advance requires understanding the loan-to-cost framework that governs all construction lending decisions. Loan to cost is the primary metric lenders use to size construction loans, and it applies to the total project cost — land plus construction — not to each component independently.
Loan-to-Cost: The Formula That Governs Everything
At Mayflower Venture Partners, our standard target is 85% LTC. For the right client with a strong track record, well-supported exit, and tight budget, we can go up to 90% LTC. That means on a project with $500,000 in land and $900,000 in construction — total project cost of $1,400,000 — our standard loan would be $1,190,000 at 85% LTC. The borrower brings $210,000, representing their down payment across both the land and construction phases.
What this means practically for the land portion of the loan is that the lender is not evaluating the land acquisition and the construction budget as separate decisions. They are evaluating the total capital stack of the project and ensuring that the borrower has meaningful equity at risk across the full project cost. On most deals, that translates to the lender advancing approximately 25% to 50% of the land purchase at closing, with the borrower bringing the balance as their down payment.
The specific split between what the lender advances on land versus what the borrower brings varies based on the relationship between land cost and construction budget. On a project where land is $400,000 and construction is $1,000,000, the total project cost is $1,400,000. At 85% LTC the loan is $1,190,000. Since construction is 100% funded by the lender in draws, the $1,190,000 loan minus the $1,000,000 construction holdback leaves $190,000 of the $400,000 land purchase funded at closing — meaning the borrower brings $210,000 at closing as their down payment on the land.
When Buying the Land With Cash First Is the Smarter Move
The one-loan structure works beautifully for most deals. But there are specific situations where buying the land with your own cash and then approaching a construction lender later — once the permit is in hand and the project is truly ready to build — is the smarter decision. These situations are not common, but experienced developers recognize them and structure their deals accordingly.
The Permit Is Still Months Away
On new construction projects — unlike fix and flip renovations, which do not require building permits to begin financing — private construction lenders strongly prefer to have a permit in hand before closing. The reason is simple: if a construction loan closes without a permit, and the permitting process ends up taking six to twelve months, you have a loan outstanding on a vacant lot with interest accruing and no construction happening. A 12-month loan can be half consumed before a shovel touches the ground. In situations where the permit process is going to be long — complex sites, new construction in historic districts, projects that need engineering studies or variances — buying the land with cash and waiting for the permit before closing on the construction loan is the way to protect everyone, including yourself from carrying cost exposure on a loan that is not yet building anything.
Low Land Value Relative to Construction Budget
When the purchase price is very small relative to the construction budget — an infill lot for $90,000 with a $900,000 build, for example — the loan-to-cost math becomes challenging. At 85% LTC on a $990,000 total project cost, the maximum loan is $841,500. With $900,000 of that being construction holdback, the lender would only be advancing $841,500 minus the construction holdback — meaning they are actually in a deficit position on the land at closing. In these situations, having the borrower purchase the land with cash and bringing a construction-only loan to the lender cleans up the structure significantly and often results in better terms for everyone.
Secondary or Thin Markets With Limited Comparable Sales
In premium markets like Newton, Lexington, Greenwich, and Hingham, new construction sales are frequent enough that appraisers and lenders can establish land value and exit value with confidence. In secondary markets or rural areas where comparable new construction sales are scarce, lenders become more conservative about advancing against land that they would struggle to sell if the project encountered problems. In those markets, owning the land outright reduces the lender’s risk profile and often makes the difference between getting the construction loan done and not getting it done at all.
Opportunistic Land Purchases That Need to Move Fast
Sometimes the best lots come available with a very short closing window — an estate sale that needs to close in two weeks, an off-market deal where the seller wants certainty over price. In those situations, a cash land purchase is the fastest and most certain way to secure the lot. Once you own the land and have the permit process underway, you approach the construction lender from a position of strength with no closing timeline pressure on the land acquisition. Many experienced developers keep a reserve specifically for opportunistic cash land purchases for this reason.
The Permit Question: Why It Matters More Than Most Developers Realize
This is one of the most important distinctions between how private lenders approach fix and flip financing versus new construction financing, and it is one that catches developers by surprise if they are transitioning from one to the other.
For fix and flip renovations, a building permit is generally not required before a private lender will close. The existing structure provides the collateral, the renovation scope is relatively contained, and the permit process for renovation work is typically straightforward and fast. Lenders are comfortable closing before the permit is in hand because the risk profile of the pre-permit period is low.
For ground-up new construction, the calculus is completely different. A building permit for new construction in Massachusetts requires architectural drawings, structural engineering, site plans, and review by the local building department. In many communities, it also requires zoning board approval for setback variances, conservation commission review for properties near wetlands, and historical commission review in designated districts. The process can take anywhere from two weeks in a cooperative municipality with a simple project to twelve months or more in a community with complex review requirements or a project that requires special permits.
From a lender’s perspective, closing a new construction loan without a permit means funding a project where construction cannot begin and where the timeline for when it can begin is uncertain. Every month that passes without construction is a month of interest accruing on a loan that is not creating value. On a 12-month construction loan, a six-month permit delay consumes half the loan term before a foundation is poured. That creates pressure to extend, which costs money, or creates a default situation, which is bad for everyone.
What We Accept at Closing When a Permit Is Not Yet Available
In most cases we prefer permit in hand. When that is not possible, here is what we need to get comfortable closing.
Why By-Right Buildability Is Non-Negotiable
Whether you are closing with a permit in hand or with an attorney’s zoning opinion letter or a stamped architect’s letter, the underlying requirement is the same: we need to be confident that what the borrower is proposing to build is buildable by right on the specific parcel under the current zoning, without requiring relief from the zoning board of appeals, special permit approval from the planning board, or conservation commission approval that is not already secured.
What “By-Right” Means and Why It Matters
A by-right project is one that complies with all applicable zoning regulations — use, setbacks, height, lot coverage, floor area ratio — without requiring any discretionary approval from any board or commission. The building department reviews the plans, confirms they comply with the zoning bylaws, and issues the permit. There is no public hearing. No neighbors can object and delay the process. No commission can impose conditions that modify what you planned to build.
A project that requires a variance, a special permit, or conservation commission approval is not by-right. Those processes can take six months to eighteen months, can be denied, and can be appealed by neighbors — potentially adding years of delay. From a lender’s perspective, financing a new construction project whose permit depends on discretionary government approval is financing a project whose completion date is unknown and whose outcome is uncertain. That is not a risk profile most private lenders are willing to accept.
By-Right — We Can Close
Project complies with all zoning setbacks, height limits, and lot coverage requirements without any variances. No conservation commission jurisdiction. No special permit required. Building permit is a ministerial review, not a discretionary one. Timeline to permit is weeks, not months.
Not By-Right — Resolve Before Closing
Project requires a setback variance from the zoning board. Lot has wetland resource areas requiring conservation commission approval. Proposed use requires a special permit. Historical commission has review authority over the design. Any of these add months of uncertainty and we need the approval in hand before we close.
This distinction is especially important in Massachusetts communities with active conservation commissions, which includes most of the premium coastal and suburban markets where new construction values are highest. Properties within 100 feet of a wetland resource area — which includes vernal pools, intermittent streams, and riverfront areas — are subject to Massachusetts Wetlands Protection Act jurisdiction and require conservation commission review and approval before construction can begin. In those situations, the conservation commission approval must be in hand before we close, full stop.
Fix and Flip vs New Construction: The Permit Difference
For developers who are transitioning from fix and flip into ground-up new construction, this difference in permit requirements is one of the most practically significant adjustments to make. On a fix and flip renovation, particularly one that does not involve structural changes or additions, you can often begin financing and even begin demolition work before permits are issued. The renovation scope is familiar to lenders, the collateral exists from day one, and the permit process is straightforward and fast.
On a new construction project, the permit process is longer, more involved, and more consequential. Architectural drawings must be completed and stamped. Structural engineering is required. The building department review takes longer. And as discussed above, any discretionary approvals needed add months of uncertainty on top of the ministerial review process. The smart approach is to start the permit process as early as possible — ideally before you go under agreement on the land — so that by the time you close on the lot, the permit is already issued or nearly ready.
The developers who move fastest and execute most efficiently are the ones who have an architect engaged and a permit application filed before they close. In some communities in Massachusetts, you can file a building permit application before you own the property, using a letter of authorization from the current owner. That strategy can save you weeks or months of post-closing permit waiting and puts you in a position to break ground the day you take title.
At Mayflower Venture Partners, we are experienced at navigating all of these scenarios. We have closed loans with permits in hand, with attorney zoning opinion letters, with stamped architect’s letters, and in situations where the borrower already owns the land and we are providing construction financing only. If you have a deal and you are not sure which structure fits, call us. We will walk through the specific circumstances and tell you exactly what we need to get the deal done efficiently.
We lend throughout Massachusetts, Connecticut, Rhode Island, New Hampshire, and Maine. Term sheets in 24 hours. Closings in 10 to 14 business days when the documentation is in order.
Have Land Under Agreement? Let’s Structure It Right.
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