Your vacant lot does not have to be free and clear. The current value of the lot is added to construction costs and prepaid soft costs. Total costs are then compared to what the house would be worth if completed already as planned, as demonstrated by an appraisal. Construction lending is back to the more conservative approach of 10 plus years ago wherein construction lenders lend off of the lesser of these two numbers, total costs or appraised value. If loan-to-value and loan-to-cost numbers are in line with current bank requirements, the new construction loan can pay off the lot loan on the property. In this way, equity in the lot comes into consideration, but the lot does not have to be free and clear.
