Remodel & Renovate in 95129>Question Details

David Lin, Home Buyer in 95070

Say I purchased an old home and financed normally. Then 3-5 years down the road, I decided to rebuild a brand new house there. How would the owner of?

Asked by David Lin, 95070 Tue Apr 6, 2010

my loan react to that? Would the home loan need to be paid off? I figure because since the house will be taken down, there is no more collateral for the bank.

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At least 20 years ago a man bought a small cabin right next to a lake. It was in very bad condition and should have been torn down. The location could not be used for a new house because of environmental laws and setback requirements for new houses.

The man literally got permits to add onto each side of the cabin. He then tore down the cabin from the middle and built the rest of the house he wanted in the location he wanted. I am sure it cost a lot more than just a tear down and build would have. But he wanted the location for his new house. To live within the legal requirements he had to do it that way.

I really do not know where a lender would call that line. Be smart, ask a lender before doing anything. The man in the example above asked the town office about replacing the cabin before he tore it down. He found out he could expand it by a certain percentage. Being smart he followed the rules and ended up with what he wanted.

You will also need to follow the rules. That means asking those who give them out. In your case it would be the lender. It may end up as a non-issue as you also get a construction loan for new construction on top of the old loan. But you must get all the information you need before taking the first step. Otherwise all of your steps could be leading you down the wrong path.
0 votes Thank Flag Link Tue Apr 6, 2010
sorry forgot to mention another possible scenario.

since I don't plan to do this rebuild for at least 3 years (to avoid gains tax when selling), say the land itself becomes worth as much as the price I paid for home, wouldn't that constitute the collateral needed for the bank? the only hiccup I see there is the bank has more difficulty selling a piece of land rather than a home on land despite the fact the value of the land is equal or exceeds what I owe them.
0 votes Thank Flag Link Tue Apr 6, 2010
thank you. great answer.

then my follow up question would be, is there a line they draw that marks rebuilding a home and remodeling? Perhaps if part of the older home was kept to build a new home, then this could wrok?

Otherwise, I'm guessing if a construction loan were needed, the remaining home/land mortage would need to roll into that construction loan.
0 votes Thank Flag Link Tue Apr 6, 2010
The only way that would work would be if you bought the old house as "land only" Otherwise the lender has an interest in the house (no matter how crappy it is) and you may find that removing it could cause the lender to demand immediate and complete payment.

Since you are financing house and land you can not remove the house. If you bought it as land only with house to be conveyed at no value it might work.
0 votes Thank Flag Link Tue Apr 6, 2010
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