Use Market Value To Finance Const Loan

scomarJuly 4, 2012

Has anyone torn down their existing home to rebuild a new one on the same lot using the difference In the market value and amount owed on existing loan? Based on a recent market analysis when we were thinking of selling we would make the 20% needed to fund most construction loans. We want to stay and us this to build on the existing lot....wondering if the bank would even consider this approach...scomar

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I don't understand. Are you saying you want to use a Home Equity Loan or a cash out mortgage to finance your new build?
If so, I am pretty sure that is a resounding no.

    Bookmark   July 4, 2012 at 11:53PM
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Absolutely not - your house goes away in the process so the collateral goes away. If the build stopped after the house was torn down and all the permits were paid for and lot cleared, the bank would be left holding the note. They don't like that possibility.

    Bookmark   July 5, 2012 at 4:30AM
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"They don't like that possibility."

It is usually prohibited on the note.

It would fall under 'wasting' (at least).

    Bookmark   July 5, 2012 at 11:17AM
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We are doing sort of what you describe - we basically took the house down to the studs for the part that we want to preserve (about 950 sq ft), demolish other sections, then put down a new foundation for the remaining 2400 sq ft. It is essentially a new build.

We were able to secure a construction loan. Basically, the bank will buy out your existing loan, and then look at the cost of construction, and what your finished home will be worth... they will loan an amount that is a percentage of that - 75% LTV. In our case, we were able to meet the requirements and got the loan, although they made us jump through a lot of hoops.

    Bookmark   July 6, 2012 at 1:15AM
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Sophie Wheeler

You would need to have substantial equity in the property and the proposed new structure would need to be able to meet a high enough appraisal figure for any bank to even talk to you about this. In other words, if this is a tiny old home on an estate sized lot surrounded by estate sized homes, and it's almost paid off, then you probably could be financed for that million dollar build if your income met the guidelines for the new loan amount. Even then, you'd better have substantial cash reserves in case it doesn't make the appraisal.

    Bookmark   July 6, 2012 at 1:37PM
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