Q: My client has an existing $434,000 mortgage and wants to keep it. But she needs money for her renovation and wants to get a second mortgage of $300,000 to knock down the mortgaged property.
She is insistent that this can be done even though her first mortgage has a “due clause” should this happen. Do banks give this kind of permission? What secures the existing first mortgage?
She does not want to refinance and include the renovation costs in a $750,000 mortgage. But she claims the property will be worth $1,250,000 when all she is done with the work. Is there any other solution?
A: Most residential mortgages require a homeowner to maintain and keep their property in good condition and repair. Those same mortgages generally state that the homeowner must not damage or destroy the property.
If your client demolishes the home, she will likely be in default under the terms of the mortgage and the lender would have the right to accelerate the repayment of the loan — in lay person’s terms, her loan could be called.
The lender would not trigger the “due on sale” clause, but rather the default clause in the mortgage. Whether the lender would decide to call the loan or not is up to that lender and the specific circumstances of your client’s situation.
If the land is worth the same with or without the home, the lender might not object. If the land is worth substantially less without the home, the lender would object to tearing down the home.
The mortgage on your client’s home is secured by the home and the land on which it sits. If your client fails to pay the mortgage, the lender can foreclose on the home and sell it plus the parcel of land on which it sits.
While lenders generally do not monitor the activities of their borrowers, your client does run the risk that the lender could call the loan if the bank finds out that the homeowner is about to demolish the home.
How do mortgage lenders make this kind of decision? There are many factors that go into the decision-making process.
If your client’s lender is based locally and has intimate knowledge of the community and property values, it is more likely to consent to your client’s desire to tear the home down if it makes economic sense. If your client’s lender is a large institutional servicer, it may be impossible for her to get somebody to tell her it’s ok.
It will be up to your client to decide whether to take the risk.
Let’s assume she takes the risk, gets a second mortgage, and tears down her house. Her primary lender might call the loan. If it does, and she has good credit, she may be able to refinance the loan quickly and pay off the first lender. She might even be able to keep the second lender by having that second lender consent to the new first loan on the home.
A good local community lender or mortgage broker in your area can give your client some additional options.