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?

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    Depending on the terms of the mortgage, you may be require to keep the property habitable. Demolishing the house probably doesn't count as "habitable".
    – chepner
    Commented Feb 3, 2021 at 20:07
  • Unless your mortgage holder is actively using this site and can look up your contract by recognizing your username user1459497 then I really don't think anyone can give you the correct answer here.
    – MonkeyZeus
    Commented Feb 4, 2021 at 14:20
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    Something to consider: the house of Theseus. If you knock down one exterior wall and build new rooms attached to the existing house, it's a remodel. If you then knock down the original house and build more new rooms, it's another remodel. This loophole adds some constraints and expense to your project, but gets around issues related to destroying the mortgage collateral and keeping the property habitable. Commented Feb 4, 2021 at 18:32

2 Answers 2

  1. The existing mortgage is for that house on that land.
  2. 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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    Could 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. Commented Feb 2, 2021 at 18:28
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    Probably 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 CO
    Commented Feb 2, 2021 at 21:21
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    You 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.
    – jamesqf
    Commented Feb 2, 2021 at 23:48
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    Not 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
    – coagmano
    Commented Feb 3, 2021 at 3:09
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    Note 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 Commented 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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    Electric 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/…
    – MTA
    Commented Feb 3, 2021 at 18:34

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