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How to rebuild when I have a land-home mortgage?


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By Andrew in Monclova, OH on 1/17/2007


I have a 1901 construction farmhouse which I own through a traditional mortgage. The property is everything I am looking for in an area where I can find work and have ready access to the city of Toledo.

How does one go about petitioning the current lender or new lender for a new loan to demo the current home (asset on the current mortgage), and build a newer, more valuable home?

Andrew


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By Michele in Stafford, VA on 1/18/2007


Hi Andrew, 

I am doing this right now. Here's how it works: You apply for a construction loan just like you would if you owned a bare piece of land. The construction loan/mortgage company is going to evaluate the house you plan on building on the lot. Your loan will be the payoff on your existing mortgage, the demolition of the home, and the building of your new one. If there is enough equity, meaning your proposed home appraises for more than the loan you need (usually they look for 80% loan to value, but will go higher in certain cases), then it's a go!

For example: my old house still had a mortgage of $100K left, my building budget I need to get the new home built is $410K, add another $30K for closing costs rolled into the loan and bank's contingency (I'll get that paid to me at the end if I don't go over budget) and my loan needed was a total of $540K. My proposed home appraised at $610K. I got the loan, house came down four weeks ago, moving right along.  I used IndyMac.

Good Luck!

Michele


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By Andrew in Monclova, OH on 1/22/2007


Thanks for the response. So I guess the challenge will be very similar to yours with the old-mortgage total being part of the loan. I guess if you can pay down the mortgage to reflect the value of the land in the construction loan then you aren't limited... if you have the full value of the old house in the new construction loan, I assume I'd be hard pressed to meet the budget for the new house.

We're looking at tear down in 2010... Is it better to pay down the existing mortgage or keep some of the funds separate so you can pay for construction apart from the loan?

Michelle, how are you doing the demo... I've been hearing that your home can be donated to your local fire dept. and they can make it a training burn... otherwise, due to EPA regulations you cannot burn it. That would mean the entire house would have to be smashed and placed in roll-off containers and hauled to the landfill. Can you give me an estimate for what your demo cost?

My house is sound, but is an 1,800 sq ft, 100-year-old pain to work on... I've been (unrealistically) hoping I'd be able to offer the house on eBay for $1 for someone to either have moved or gut and tear down as part of the auction.

Andrew


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By Michele in Stafford, VA on 1/23/2007


Good Morning Andrew,

    You may think that you would be hard pressed to get equity in your land with the full value of the house still owed. You may be surprised. Your land may have appreciated since you bought it, and your new home on this piece of land, because you are saving so much O-B'ing, may appraise for enough money over what you need to build it, to end up giving you equity. Check it out with a professional mortgage appraiser. I would not recommend planning to build a house anyway without already knowing if you are in the realm. It depends on what order you are going in. I was not ready to shop for a mortgage until I got right to the end of my planning. I did not want to get blueprints for a home I was not going to get a loan for, so I invested $300 up front and got an appraiser person to give me the scoop on the reality of what I was trying to do. 

    As for the fire department. Yes, they are a great opportunity. It's a win-win; you give them a nice donation and they kindly burn down your house in training. Ashes go in the cans. I had the same plan and would have continued down that route, but time was an issue for me. I had a hard time with my local county over permits, which put me way behind schedule on the time of year I had to start building, and when the specific crew I wanted to hire was available. The day after my permit came in, I was ready to go, but the fire department schedule was not in sync with mine. It would take them two weeks before they could come out, and then they said they needed a few weeks to finish the whole thing (I guess they were going to burn, then put it out, then burn some more on another day?). I just could not wait that long. So, if you are going that route, make sure you understand your local fire department's rules, like trees located near the building that have to come down first, and their timeline, and make sure you plan for that.

    My shack was 980 sq ft. I got a guy to knock it down for $1,200. The roll-off cans filled with the debris, including foundation, was 6 @ $425 a pop. Even if you burn down your home, you have to load the ashes, and you still will have foundations and chimneys to haul off. Roll-off cans usually have a set price for a can up to four tons (in my area anyway). Your foundations could put it over its weight and you could easily pay additional fees when it is weighed at the landfill (depending on your local laws). All things to keep in mind. I learned all of this after the fact, as I went along. So the additional fees for the cans being overweight I had not budgeted.

   Sorry for rambling, hope this helps.

Michele


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By Michele in Stafford, VA on 1/23/2007


Andrew,

I forgot to answer your first question. My recommendation would be to hold on to your money and not pay anything down in advance. You'll need working cash for your project. If you are not doing this until 2010, you have three more years of appreciation on your property. Once you get to 2010, you'll know better where you stand as far as appraisal on your project, then if you need to, you can take your cash and put it toward closing, but you may not need to. Again, don't look at it from what your mortgage is now. You have to look at it from what you are building. It doesn't matter if you still owe, as long as what you are building in the future appraises well. The banks are not going to care about what's torn down; they only care about what you are putting up.


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By Andrew in Monclova, OH on 1/24/2007


Hi Michelle,

I really appreciate your assistance on this... searching online for "teardown demo rebuild home finance" on Google brought me all the new articles one could wish about Hurricane Katrina, but nothing on how to do what you have covered.

I agree it's counterintuitive to tear down a home and rebuild another one, linearly increasing the amount you owe the bank. So far my family has been regarding my intention with wary curiosity. One personal variation from the O-B theme will be that I don't anticipate selling this property... so the potential equity shouldn't become real cash, just tangible mortgage to pay down. 

Still, the teardown is much needed if we're to stay on this property, and it's only money... it has to be spent somewhere, right?

Thank you for your help,

Andrew


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