Mortgage question

[walkabout]

Firts of all I would like to thank you all for a great source of information from this forum. It has been a pleasure to read the posts every day.

I have been planning to rebuild our cabin in 2009 and have run into a few mortgage roadblocks and was wondering if any of you have run into similar problems?

My wife and I have a lake cabin in Minnesota. The current mortgage value is approx 100,000, the land (without current 1920's cabin) is valued at 110,000, while the land and the cabin is valued at approx 150,000. These values are what the local government values them for. We have saved enough to pay cash for the first 1/2 of the cabin rebuild and believe we will have enough cash over the next year and a half to complete the project.

I contacted our current mortgage company to make sure it would be OK to tear down the existing cabin and rebuild a 20'x30' single story myself and they denied me without giving a reason. I mistakingly thought that since the land value was higher than the outstanding mortgage that it would not be a problem. I then visited another lender today to inquire about refinancing with them so that I could rebuild and they denied me saying that I would need to get a construction loan.

What is the best mortage to go with in our case?
Lot loan? These seem to be for vacant lots with a future plan to build.
Construction loan? I don't intend to finance the cost of building, but just the land so this seems not be what we need.
Conventional? seems this won't work.

We do have a primary residence that will be paid for in 4 years in Minneapolis. We could use a home equity line of credit if that is the last resort, but would rather not since the HELOC rates are a few percent higher than conventional loans.

[muldoon]

if you already have a mortgage on the place I am not sure why you need permission to build on it.  Are you looking for more money from your existing finance company to finance the construction?  Is that the part they said no to? 

[MountainDon]

I understand that he/they asked the mortgage company if it would be okay to tear down the existing structure. They don't want to see the old cabin disappear as they would see that as reducing the property value. That's what I see the problem to be. Could be wrong.

If you have cash to get started on a new cabin is there a problem with building the new one, using the cash, and tearing down the old one later? Or there's not enough room?

Maybe I'm missing something...

[CREATIVE1]

Same thing happened to me.  I went to a real estate attorney, and he said that I couldn't demolish the house until the mortgage was paid off.  And this is with a new home going up that was built with cash!  So I paid off the mortgage early and had less money to build.  But there may be other options.  So---make friends with an attorney.   And talk to an experienced mortgage broker.

Another thought--could your rebuild be an addition to the other cabin, or somehow incorporated into it?  Maybe that would give you some leeway to take some of it down during the process.   

[walkabout]

Muldoon,
We do not need to nor do we want to finance rebuilding the cabin. We were just asking permission from our mortage company to tear down and replace the cabin.

MountainDon,
I suspect the mortgage company is worried that if we tear down the existing cabin, but for whatever reason do not rebuild, they will be left with a mortgage that is more than the property without a cabin is worth. In our case I believe the land is worth more than the mortgage.

Unfortunately we can't build first and then tear down the old cabin, since we want to build in exactly the same location as the old cabin.

Creative1,
Unfortunately we do not want to wait till be paid off the land before rebuilding since we are without running water and have a nonconforming toilet (outhouse). We have been bringing in our own water for the last 3 years and are ready to "upgrade" to the 21st centuary.

I will contact a few brokers as you suggest.

[brian_nj]

I would suggest looking into your local farm credit union. We have used one on more than one occasion to buy property and they have been very very lenient with things. The last house we bought was a fire damaged foreclosure. They were more than happy to let us do what we wanted with the place with our 20%

[NM_Shooter]

Do be careful with fire this Christmas season 

-f-

[CREATIVE1]

Now that you've provided more information, maybe the way to go is to convince the bank that the cabin is actually a hazard/unsafe and needs to come down?

[phalynx]

Do NOT play with fire this Christmas.......  they already have you on record asking to demolish it... 

To answer your question, you should look into just building your new building.  When finished, have it surveyed and have the old building listed as "to be demolished".  Then go an refinance the loan with that new survey.

[Squirl]

The problem for the mortgage company seems to be that the land is valued at $110,000 and your mortgage is for $100,000.  They look at it in default terms.  First, banks don't like to loan that much money on land, especially not in these times. Second they currently have a $50,000 cushion in the event of a default. (those have been pretty high lately)  Even if the land sold at what the county values it at (which never happens around here), they would be spending a lot of money and legal fees to break even.  Many banks are looking for 20% down on almost any real estate transaction these days, and you would no longer have 20% equity in the land if the cabin was demolished. Remember that $50,000 in equity you look at as yours the bank looks at it as theirs.  They get paid first in the event of a default.  The old bankers saying goes, "If you have 90% equity and 10% loan left, you've got the problem.  If you have 10% equity and 90% loan, the bank has the problem."

Why not just sell the cabin for $150,000.  Take the $50,000 use it as a 50% down payment on a lot, and use the cash that you were going to build with to build.  It might be easier.  Just throwing out ideas.

[walkabout]

Thanks for all the responses.

Phalynx,
Unfortunately I have asked to tear down the old cabin already so I can just go ahead and plead ignorance by tearing down, rebuilding and then refinancing. The new mortgage company might not care, but if my existing mortgage company found out I would be in trouble.

Squirl,
We love our lake front property even though it is fairly crowded. It is 50 miles from our primary residence in Minneapolis, surounded by property that has and is selling 2 - 3 times what we paid 3 years ago, and is a great multi purpose lake (fishing and water sports).

Maybe our only option is to use a home equity line of credit on our primary house to pay for it out right so that the mortgage company has no say. CREATIVE1 had a similar problem and ended up paying off the loan.

All,
I will let you know if and when we find a solution to this problem.
Things I am going to try are : A. Call a mortgage broker I have dealt with before. B. Call a credit union/bank that is in the small town where our cabin is. C. Look at construction loans, even though they seem to require a licensed contractor before the loan is made, which might be a problem since I want to follow in most of your footsteps and build the cabin with my own hands.

[phalynx]

walkabout,

I am saying just build the new building, leave the old.  Resurvery with the old marked for demo.  Then take that survey to a new bank and refinance.  After you get the new loan, you can demo the old building. 

Land loans typically have 20-25% equity for the loan.  That's why they aren't too interested in doing a 100K mortgage on 110K of property.

[MountainDon]

I believe the problem is they want the new structure to sit on the old (existing) location, not somewhere else.

[John_C]

Could you describe it as a renovation.  I know of a few project done that way that left very little of the original structure.  Sometimes they go back on another renovation and remove what was left. 

[MountainDon]

As for using the HELOC, would you be able to use the interest paid there as an income tax deduction (if you itemize) ? Not ideal, but maybe better than nothing.

[JRR]

I would shop around for other HELOC's.  My wife and I established one on our home recently and got a very surprisingly good rate and then bought some foreclosure property as a cash purchase.  And rates should be even better now.

[FrankInWI]

you mentioned a "home equity" loan on the city home as being at higher mortage rate.  Don't make it a home equity loan, re-finance with the new fantastic low mortgage rates.... a first mortgage, but if you only owe $10,000 yet, make the re-finance for $80,000 or whatever you need. 

[CREATIVE1]

Could you describe it as a renovation.  I know of a few project done that way that left very little of the original structure.  Sometimes they go back on another renovation and remove what was left. 

That's what I was talking about. I know LOTS of people who've done it to avoid impact fees and sometimes to keep from bringing everything up to current code.  I was considering doing it too, and even drew up plans for the renovation, but finally decided that so little of the original structure was usable we just had to let it go.  (The only z-shaped house I've ever seen ). 

By the way, you usually need to get a permit to demolish a structure too.  They get you coming and going.$$$$$$

[rwanders]

Be careful about building another cabin on mortgaged property-----If you do it will then be "attached" to the land and thus will become additional collateral for the bank's existing mortgage on your legal description. You need to consult a good real estate lawyer before you do that. 

The existing mortgage is secured by a legal description and would include the land and any structures attached thereon regardless of when they were built in the event of a default and foreclosure action.

[harry51]

Speaking of foreclosure actions, it's useful to know that lenders can't sue for a deficiency if a property is foreclosed upon and sold for less than the balance owed to satisfy a purchase money loan, but they can and do sue for a deficiency if it's a non-purchase money loan, i.e., a refinance, home equity loan, etc.

[phalynx]

That's not exactly true.  If it's an FHA loan, they won't sue for a deficiency.  They can, they just don't.  If it's a VA loan, they will absolutely sue for the difference.  If it's a conventional, they may, depending on the amount.  If there is any PMI insurance, the mortgage is sold for the exact amount owed on it and purchased at the court house steps by the very same mortgage holder.  They don't get to collect on the PMI insurance until it is sold.  So they buy it, collect their 25-35% and then try to sell it.

[harry51]

Well, as Peg says, "it depends".  Apparently there are different rules in different states. In California, this is the story:

California's Anti-Deficiency Laws - a brief refresher

What is the anti-deficiency statute?  It is California Code of Civil Procedure Section 580(b).

The code states in relevant part:

"No deficiency judgment shall lie in any event after a sale of real property or an estate for years therein for failure of the purchaser to complete his or her contract of sale, or under a deed of trust or mortgage given to the vendor to secure payment of the balance of the purchase price of that real property or estate for years therein, or under a deed of trust or mortgage on a dwelling for
not more than four families given to a lender to secure repayment of a loan which was in fact used to pay all or part of the purchase price of that dwelling occupied, entirely or in part, by the purchaser."

In plain English - the statute addresses 2 types of loans:

1) purchase money loans and

2) seller carryback loans.

Under the statute, seller carryback loans are not entitled to seek a deficiency judgment against the borrower.  However, there is an exception under California's stare decisis (case law) that does permit the seller to recover against the borrower under certain circumstances.

As for the purchase money loans - no deficiency if it is owner-occupied, residential one to four.  What does that exclude? vacation homes, home-equity lines of credit (HELOC), investment properties where the borrower does not reside there, apartment buildings more than 4 units.

These loans are commonly referred to as "non-recourse" loans because lenders on these types of loan know their only recourse is the security (collateral).

Phalynx, thanks for reminding me to keep in mind that things are different in different places when posting!

[walkabout]

Thought I would update everyone with what direction my wife and I took with our mortgage/tear down issue.

We are in the middle of a re-finance of our city house mortgage and are pulling as much equity out as we can  so that we can consolidate all our mortages and a home equity loan into one loan and almost pay off our cabin mortgage. We will however have to empty our cabin building fund to fully pay off the cabin mortgage, but this will allow us to do what we want to our property without having to get approval from the bank.

We went down this route after trying to get a new mortgage on our cabin with several lenders, but as soon as I said I wanted to tear down the cabin they said no. I also looked into owner builder construction loans and the 2 places I called said that they had temporarily stopped offering them because of the current economy and mortgage crisis.

In the end we will own the cabin property outright, have a much lower interest rate on our consolidated mortgage debt and have much better cash flow. We will use this better cashflow to replenish our cabin fund.

Onto the planning phase!!

FYI I am building a 1/12 scale 1 story to familiarize myself with the techneques in framing etc.
Here is a photo of the basement and floor framing with an opening for the stairwell (everything is 1/12 scale including the framing)


Here is a model I made of where the cabin will be on our property:

[river place]

Glad your got the situation to work out.  I was going to suggest moving the old cabin over and build the new one on the previous cabins location.

[glenn kangiser]

Cool model, walkabout.  Gives you an idea of what's up.