We just did this a year ago. We bought the house with a mortgage (bought as "investment property" b/c we hadn't sold our home yet). Now we are about to start the demolishing part! We have to get a construction loan large enough to pay off the mortgage on the lot as the bank wants to take over the loan on the property while we build. Our bank is having us contribute our own $$ first (i.e., we use our "available funds" and pay off most of the mortgage, they pay off the rest, then the remainder of the loan that is available will actually be used for construction). It is better to put our money upfront first - the interest clock will start to tick later in the game. We only pay interest on the amount of the loan we have actually used, not the total loan amount. Our bank only charges the fees for the loan (1/2 pt, I think) on the amount we are borrowing for construction, not the additional amount they are using to pay off/assume the lot mortgage. I thought that was decent of them, so you may want to ask about that.

Niffy
Thank you for the explanation. So let's assume some figures, that will help me to understand more clearly. The house to be demolished is $100K for example. We pay the mortgage monthly payments untill we decide to demolish. At the demolition point we need to notify bank? If so, the bank will give us construction loan let's say of $200K. Let's say we have "oun available funds" of $50K. Where our funds go and what is left for us to use for actual construction? How do I convert the construction loan amount that we used (let's say we did not use the entire money avaialble to us from the bank)into regular mortgage?

You have to pay off the existing debt before starting demolition or the owner of the mortgage can call the note for 'waste.'

You have destroyed the house that is the security for the loan.

Brickeyee
So basically I can not start building untill I pay off the mortgage amount? Is there a way to get construction loan that would equal the mortgage ammount plus any needed money for construction? Then after cosntruction is complete to turn it into regular mortgage, or do a construction to permanent?

Hi, I am also in VA. We tore down an old house and are building now, here is how we did it:
Step 1: got a HELOC on the existing home
Step 2: bought a lot drawing on the HELOC for the 20%downpayment, financed the rest with Suntrust;
Step 3: sold existing home, moved in with mom
Step 4: chose a builder (who is also an architect, so handled the plans and the construction)
Step 5: found a bank (BB&T) who does construction loans and charges reasonable fees (around $1000 over regular mortgage closing fees)
Step 6: worked up house design with the builder/architect
Step 7: closed on the construction loan (must have Step 6 done first so that the bank can get an "as built" appraisal, banks typically won't lend more than 75% of appraised value which is lot value (any existing dwelling not included) plus what the house will be worth when built)
Step 8: bank pays off the mortgage on the lot
Step 9: construction starts; bank disburses funds in draws as parts of construction are completed; our remaining cash is contributed first (at loan closing and first draw)
Step 10 (future): after completion, converstion to permanent financing

"Creative" financing is in VERY short supply these days. Your must justify the fact that you will be building a home worth substantially MORE than the existing home, and the bulk value of the existing home must be in the land, not the home. Just because you buy a 200K teardown house on a $400k lot, and it will cost you $400k to construct a new home on the lot doesn't mean that it will all appraise for 800K once the project is done. With property values falling, it could be substantially less. But, you will have a 1M debt to manage, so the bank will want to see substantial documentation as to plans, potential value of the new property, and probably experience level of the builder. You won't get a loan amount for more than the project will be worth, and property values have dropped substantially. You may think your project would appraise for 1.2M once you're done, but the burden of proof of that would be on you, as you are the one seeking the loan. Most banks are pretty risk averse these days, and that's a pretty big risk to take.

This isn't an easy project to get green lighted anymore.

Thank you for the feed back. Basically we are looking at the lot which is worth 260K even now at bad times (land sales here are stariting from 300K now, no dwelling units). The total purchase amount is 270K, the dwelling pretty much worth nothing. This is a foreclosure. A new house at about 2000sf will be at least 600K (now there are very few foreclosures of this size houses at 550K). We plan to spend on the constrcution not more than 200K (too bold??).I work for a national builder and have access to the vendors and the pricing. I can use our vendors and I think the vertical constuction should be no more than about 80K if we do everything after DRYWALL stage ourselves (all finishes). I am trying to reserach the not-construction costs (permits, inspections, plan drwaings, all needed approvals). What should I expect to spedn ont the non-construction items plus a supervisor for the site? We do not plan to hire a GC, just a superintendent....

I do not believe I can not build a home with $100K-150K. We build (at the company) a 3500 sf homes for 150K including all finishes. If I can hire all the same subs at the known cost, I should be able to come close to this number plus any additional cost associated with prior-construction activites. Basically you are saying that a 2000 sf house can not be built at 280K?? I.e. all owner builders build at $140/sf and more? Then where are the savings between building yourself vs hiring a company? I spoke witht he company that builds 2000sf for $211K on your lot including all permits, up to occupancy.

You really need to talk to a bank. As I said, if you pay cash, you are free to do what you wish, but if you require a loan, the bank will have their own terms for letting you use their money, and they will want enough collateral so that they don't lose money should things go sideways and you only complete the teardown or maybe the shell framing, etc. Building a builder grade home will not satisfy them as a good enough reason to tear down what's there, and a builder grade home will not appraise for $600K+. Unless you plan on building an actual 600K home, the bank has no incentive to work with you.

As a builder myself (24 years in the trade, 18 years in business for myself) I have seen any number of these "2000 Sqft home for only $200K on your lot...including permits!" companies come and go. They flourish for a bit, (depending on what point in the residential construction cycle the economy is) and completely saturate all the media markets with their mantra of "keeping the high cost of building within reach" and helping the modest income earning homeowner wannabe achieve their dream of home ownership, by keeping the 35% - 40% "profit" out of the rich contractors pocket and in theirs as "instant equity" and cost savings by doing it themselves. People unfortunately eat this up... to the point that they fail to see the realities that become their nightmare somewhere around 70% completion. These are the same folks (clients) that wonder why it is going to take multiple months to build their project.... because after all Ty Pennington and his crew are able to build a whole house in a week.... of course they can, anyone can see with their own eyes, just turn on Extreme Home Makeover and watch. The irony of course is that they call their show a "reality" show. Ha! Yeah Ty and the crew are "keepin' it real" alright. Ya know, I think since he has the building market all sewn up, maybe I will start my own "Lawyers" reality show. Yeah... where high profile clients like Bernie Madoff or Scooter Libby would be given free legal representation, and their entire defense, including trial and appeals, would be done in 5 days or less. Just think how much more exciting the OJ Trial (#1) would have been. I'll call it "Swift Justice" , maybe... or actually "Extreme Swift Justice" yeahhhhh... that sounds good. Hmmmmm..... now,
where can I get a bus.....

I tatally agree with your thought.I approved your thought.
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Mortgage