In the Construction phase the Brokers job is to find out your "Acquisition Value" (AV), this is not the *Market Value (MV) but what that the Construction Underwriter (UW) will use to determine if you will need to bring any monies to  Settlement. Moreover if you will need to pay any Mortgage Insurance (MI) during each drawl (or pmt. made to the builder from the construction lender.) if your proposed construction loan is above 80% of the AV.

 * The Market Value is the proposed Value of the lot and the house AFTER the house is completed and you have received the Occupancy Certificate (OC.)  This value is used for the "permanent financing" and it determined by the Plans & Spec Appraiser.

How do we come up with the AV? 

·         We take the current value of the lot by using a "Plans & Spec" Appraisal conducted by a licensed Appraiser.  If you've owned the lot for at least 12 months, we can use all the "Equity" (i.e., the current MV - existing bal.), if less than 12 months we can only use the "Sweat Equity" or the money you have paid for the lot (down pmt.) and any other $ you've put into the lot, e.g., clearing trees, well, septic, etc…

·         We then take the "cost" to build the house and add it to the cost of the lot, then  subtract the realized Equity (if owned for 12 months) and add in any Sweat Equity.

Example: 

(I'm assuming current Value of the lot = $200k & cost to build home = $200k):

1.   Original cost of lot = $185,000 (Assumed purchased over 1 yr. ago)

2.       Down pmt on lot = $54,605 + closing cost paid est. at $2,200

3.       Est. existing bal on lot = $130,000

4.       Plans & Spec Appraisal for lot = $200,000

5.       Est. Equity = $70,000

6.       Est. Sweat Equity (so far) = $10,000 (e.g., $7,800 clear lot + $2,200 est. Closing Cost)

7.   Est. total Equity = $90,000 or $200k - $130k - $10k

8.       Est. Cost to Build = $200,000

9.       Est. Construction Loan = $330,000 + est. Closing Cost of $8,000 = $338,000

10.   Est. Acquisition Value (AV) = $200k (house) + $200k (value of lot) + $10k = $410,000

11.   $410,000 - $338,000 = $72,000 - (Equity)

12.   $338,000 ÷ $410,000 = 82% Loan-To-Value (LTV) - (At this point, if my math is correct, you would need to bring 2% of $410k or $8,200 + Closing Cost to the Construction Settlement in order to not pay MI and to gain A Paper (80% LTV) financing on the future Permanent loan. With this said, if your P&S Appraisal comes in higher, i.e., $8,500 or you can prove more sweat equity (e.g., paid in cash for the drive way, etc..) you might not need to bring any monies to the Settlement Table.