I own a single family home in NYC, Queens. I have a mortgage on that property. My Zone permits 3 Family house. I would like to demolish the single family home and build a 3 unit property. How does it work? Will my mortgage company let me do it? Or I have to pay off the house first then build it?
How does paying off the mortgage work if I demolish a home and rebuild another home on the property?
2 Answers
- The existing mortgage is for that house on that land.
- It's (almost certainly) an "owner-occupied" mortgage.
Thus, you'll have to talk to the bank. They'll want you to refinance the property (which pays off the original loan) with a new "commercial" mortgage (probably at a higher interest rate).
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5Could also add a note that any refinancing would need total equity in the demolished property to be sufficient to cover construction costs, or other similar security being provided by the bank. Feb 2, 2021 at 18:28
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41Probably need a construction loan rather than an investment loan or a combination of loan types. Don't just talk to your current lender, talk to other lenders to to see what they can offer you. It's important to shop lenders in general, but much moreso the less boilerplate your situation is.– Hart COFeb 2, 2021 at 21:21
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5You would probably want to go directly to a commercial lender, rather than your current one, which is probably focussed on home mortgages. Part of the construction loan would be paying off the current mortgage.– jamesqfFeb 2, 2021 at 23:48
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6Not sure how it works in NYC, but where I am, lenders will accept the projected final value of construction as security, rather than just the equity of the property after demolition. Specifically this has helped keep the loan/value ratio down on my construction loan– coagmanoFeb 3, 2021 at 3:09
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1Note that the OP may still be able to get a residential mortgage written for their new property once all's said and done, even if they need to refinance with a commercial construction/bridge financing package to make the rebuild happen -- HUD loans can be written for anything from a single-family up to and including a quadplex Feb 4, 2021 at 3:14
A mortgage is a secured loan, like a car loan.
A secured loan has collateral - the thing of value that backs up the loan. When the collateral stops having value, the loan principal is immediately due in full. Normally, insurance takes care of that.
In practice, if they catch you, things could turn ugly for you. They could immediately call the note. Now you have to rush around for a construction mortgage that will both pay off the note and fund the construction. They don't owe you any cooperation; they could foreclose at the worst possible time, and then go after you for their net losses, since you deliberately destroyed the collateral without telling them.
The correct path is to draw up your plans and then get a new construction mortgage, which pays off the old mortgage and finances demolition and construction. The lender will perform due diligence and make sure that your plan makes sense. If it doesn't, they won't issue the loan.
By the way... there are severe limits to how much DIY work you can do in a rental unit. Expect to have to hire all work done.
However... sometimes this can work. It's not unheard of for properties to be worth more with the house gone. That happens when desirable land with a house that's not a good fit for what the neighborhood has become. You still can't "just do it", but the lenders may be OK with the change.
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11Electric work by an owner in New York City? Not allowed unless the owner happens to be a licensed master electrician. Can't even replace a single switch, outlet or light fixture. www1.nyc.gov/site/buildings/homeowner/…– MTAFeb 3, 2021 at 18:34
user1459497
then I really don't think anyone can give you the correct answer here.