A person lives in and owns a house worth $100k free and clear. He wants to buy a piece of land and build a house that, when complete, the land and new home will (ETA: COST) $400k for land purchase and construction. He has no cash.
Is there a clean way that the person can go to a bank and basically “use” the existing house as what amounts to a 25% down payment with the understanding that when the new house is ready, the old house is sold and the bank gets the proceeds as a down payment, leaving the owner with a $300k mortgage on the new place?
I never thought of that! It’s late. I just wondered if there was more of a “one step process” type of loan, because in that scenario, the person is paying on his: 1) home equity loan, and 2) his construction/new home loan, paying closing costs on each, and likely a higher interest rate on one because the credit bureaus are dinging him from having two different real estate loans out there.
But just to note that any lender obviously does care about your overall financial situation, your income vs your obligations. So the fact that you have to repay the loan on the first home will be factored into their assessment or whether you qualify for a mortgage of that size on the second home.
There are Bridge Loans for this purpose but they’ll have higher rates. In the case in the OP there’s no explanation of where the other $300K for land and construction comes from. A Bridge Loan is used to provide that money for the specific purpose of producing a new house, including a down payment if necessary. You will have difficulty securing a $300K mortgage down the road while holding a $100K mortgage with no equity and unpaid costs on the new house.
I’m not sure what you mean. The other $300k comes from a loan from the bank, through whatever product they have.
You mean the old house? If so, that’s why I am asking the question. It seems that this would be a common scenario that some financial institution has made a product for instead of looking at it as the borrower will unable to make two mortgage payments long term when the first mortgage will be going away.
Ok, that loan would be the Bridge Loan. That’s the part I didn’t pick up before. If the loan can include the down payment it will do so at a higher interest rate than a home equity loan. The purpose of a Bridge Loan is to provide the cash for construction that will be refinanced when the job is completed. The problem is that it may take time to sell your old house and you have to keep paying the mortgage until you are done. I think it’s a good idea to put your old house on the market as soon as you secure the financing so you can do one of those big closings with multiple parties and banks. I went to one that started to sound like a 3 Stooges routine as documents were passed through 3 people, each one reading the name of the document then signing it before passing it on.
In the UK at least, it is possible to borrow the money for the new house in stages and to use the part-built property and the existing property as collateral.
The lender will base the loan and the interest rate on your income/expenditure ratio. You want $400k and they will only lend you that if you can demonstrate that you have sufficient disposable income to make the interest and capital repayments. Of course, if you sell your $100k property and move into a shed on the new land, that will make it a lot easier.
Typically, self-build mortgages are offered by specialist lenders such as building societies, and also be some banks.
For a self-build mortgage you usually receive funds at different stages of the build, and traditionally this was reliant on a valuer visiting the site to sign off on these stages, and release the next tranche of funds. However, this can run the risk of cashflow problems if the site is “downvalued”, potentially leaving you short of money to pay bills or progress work.
Wow 8.5% to 10% interest. I guess they want the extra money that comes with dealing with the extra hassle. It seems to me to be cheaper to sell the house, live in a hotel for a month, then live in a camper on the property while the new house is being built (and then sell the camper).
Personally I’d do it that way instead of being on the edge of insolvency because of the mortgage obligation on the original house and no equity left in it. Then you’ve paid deposit and have your old monthly mortgage payments left over.
The OP’s scenario is "A person lives in and owns a house worth $100k free and clear. " so no existing mortgage.
I still think that they need to raise as much cash as they can by selling the house and then keeping living costs as low as possible. Building a £400k house would require funds of £500k to be available.
Yes, and as I think about it, paying 10% per year on a Bridge Loan on $300k is $30k in interest one would be paying for the first year while the new house was being built. You wouldn’t even have to live in a camper to save money on that deal. Sell the house, rent the cheapest but safest apartment you can find, and then move into the house.
ETA: That should read $400k and $40k because the Bridge Loan is for the whole thing, even though you own a house free and clear.