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Last year my Father died and left the house to me (daughter). It is through probate and registered with the town as mine. It is a two family house that was occupied by my father on one floor and I on the other.

There is also a $100.000 mortgage amount left that I am paying but is still in his name.

My plan would be to remodel the house and live in one and rent the other. I would need approximately $100,000 for the reconstruction.

How can I accomplish this?

Zillow estimates home value (if it was in good shape) at $213,000. We’ve been told by the bank they won’t allow us to “refinance” as the existing mortgage is in my deceased father’s name, so the bank wants us to essentially “buy the house” despite being the titled owner of the property.

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    Can you afford a $200k mortgage? You should refinance anyway, to get rid of the mortgage that's under your father's name anyway. What was the property appraised as, when you inherited it? – mkennedy May 17 at 20:24
  • Thanks for responding. We were told by the bank that we cannot refinance the mortgage because it is in my fathers name. We would have to essentially "buy the house". On Zillow the price is 213,000 but that is if it were in good shape I am sure. We don't know where to turn. I'd be grateful if I just know which direction to go. Thanks again. Roni – roni May 18 at 19:28
  • @roni When the bank says you need to 'buy the house', that does not mean with cash; you could buy it with a new loan, as long as you can afford a 200k mortgage. That 200k mortgage could come from the same bank or a different one, and you should shop around to see who would give you the best interest rate. – Grade 'Eh' Bacon Jun 18 at 13:40
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You don’t say where your father’s home is located, and the relevant laws vary from jurisdiction to jurisdiction. So the following answer should be viewed as general information only. At some point you might want to consider speaking to a lawyer or solicitor.

If I may, let me address a minor point of terminology first. In virtually all jurisdictions, a bank’s mortgage is only a lien on the ownership of the property. Nevertheless, for historical reasons, some folks refer to that as, “the bank owning the house” and paying off the mortgage as, "buying back the house." Technically, in most jurisdictions, that’s wrong; the bank only has a lien on the ownership. I believe that is why the bank told you that you had to “buy the house”; I believe that all the bank meant was that you would have to pay off the loan and replace it with a new one. That is what is called a “refinance”. I don’t think that you have to be concerned about paying the purchase price or value of the home. You might want to check again with the bank.

If you weren’t contemplating a construction loan, as long as the bank continued to accept your loan payments, whether or not to pay off the loan would depend on how favorable your father’s loan is to you. But, if you want to get a construction loan secured by a mortgage, it is likely that you will have to pay off your father’s mortgage at the same time. Why? I will try to explain.

There can be more than one mortgage encumbering a home at the same time. But when there is more than one mortgage, they are not equal in priority; the so-called “first mortgage” is “prior to” the “second mortgage” and, if there is a “third mortgage” it is "junior to" the “second mortgage”, etc. This is critical because, if they are not paid, and the first mortgage forecloses, it likely “wipes out” or destroys all of the subsequent mortgages and those junior lenders are left with no mortgage at all.

You can see why a bank is at a disadvantage if it holds a second mortgage. Although not terribly uncommon, having more than one mortgage on a home at the same time is in the minority because most “institutional lenders” (banks, insurance companies, credit unions etc.) are not willing to put themselves into the more dangerous “second mortgage” situation. For that reason, generally speaking, a new institutional “construction lender” would not be willing to put itself into a “second position” and it is unlikely that your father’s lender would either. (There are some ways to get a construction loan with a second priority mortgage but those can be more expensive, and the chance that your lender fails to have the construction funds when you need them, may be increased.)

All this means is that, to get a construction loan from an institutional lender, you will probably have to use the new construction loan also to pay off your father’s mortgage and bundle the loans all up into one mortgage. This process would “refinance” your father’s mortgage for $100,000 and finance the construction for $100,000, resulting in a new loan for $200,000 and a new mortgage for $200,000. Depending on the rates being charged for your father’s old mortgage and the rates that would be charged for your new mortgage, that may or may not be financially beneficial.

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