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We are buying in April 2020 a waterfront property in a resort area. The contract price is $1M, and we will have cash to complete the purchase. The property has a decrepit cottage that we will demolish in preparation for building a new home. We will not live in the cottage or on the property until the new construction is completed, likely more than a year from our April 2020 closing. While we have cash to buy the property, we do not have enough cash to build the new home without withdrawing a significant percentage of the needed funds from an IRA. We are old enough to withdraw the IRA funds without penalty, but to avoid a spike in our income tax liability, we are hoping to borrow $350K to finance that part of the construction for which we don’t have cash. In other words, we’d rather borrow $350K than withdraw it from the IRA. In googling around the internet, I found secured loans and construction loans that seem to top out at about $100K, with many companies offering far less. My impression is that we couldn’t get a “traditional” property mortgage since we plan to demolish the existing house.
We were hoping to get some kind of interim $350K loan to complete the construction, then pay off that loan with funds from a new, traditional mortgage from Quicken or another similar lender once we have moved into the new house. We also have an 80-acre farm that we own outright and that could be used for collateral. Philosophically, I like the idea of having a mortgage on my house.
Does anyone see a way that we could borrow $350K given our circumstances? Am I right in thinking that we couldn’t get a mortgage with plans to demolish the existing cottage? (The value of the property is entirely in the land – removing the cottage will cause the property value to increase slightly.) Are we making a mistake in paying cash for the property? I appreciate anyone who takes the time to reply to these lengthy questions, because I’m not sure where to turn.
Location: We_tside PNW (Columbia Gorge) / CO / SA TX / Thailand
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Line of credit
Home equity loan
Stock / equity secured loan
401k loan (if still employed)
Building loan (new construction)
Hard money lending
Margin loan (on investment account)
Cash....
after struggling though financing the building of my first home.... I found alternatives to banks, and haven't been back since (34 subsequent properties).
Paying cash for property? Equity in property is some of that hardest money to get to. You can easily get a construction to permanent loan to finance the build. The risk is higher, so expect a higher rate. You can get jumbo construction loans, the amount is not a factor or capped at some ridiculously low number. With a construction loan, the builder will have “pay points” that he and the bank agree to. At those times, he’ll be able to request a draw against the loan to pay his costs. The bank will verify that when he wants $100K, for instance, he has done $100K worth of work. Building without a bank is one of the worst things you could do, in my opinion. The bank owns responsibility to make sure payments are made in line with meaningful construction progress. Once the build is complete, you can refinance to a lower rate or out right pay it off. Good luck.
I'm not sure why you think you can't get a construction loan for $350,000. People do it all the time.
It's sounds like you'll also be paying cash for some of the construction costs?
Many lenders will require you have a significant down payment (think 20%) for the construction loan. Some may give you partial credit for the down payment based on the paid off land. It won't be the full amount though.
You may want to rethink paying all cash for the land and use part of those funds for the building.
Find a local lender and start asking them for the options.
Thanks for all the great feedback. I've got several questions based on your ideas:
1. Would we be able to get a HELOC on the property (after we close on it) even though we plan to demolish the house and won't be living on the property at the time we apply for the HELOC? (We'll be renting during the design and construction period.)
2. Is it possible to get a traditional fixed-rate loan for purchasing a property where we plan to tear down the existing house? My impression was that it is not possible to do this, as lenders consider the house to be part of the equity they are lending against.
As earlier posters said, you should look for a one time close construction loan for this project. They are not offered by all lenders, so you need to shop for it.
Find a local expert who is an expert in construction lending. Once time close construction (OTC) loans are more complex than your normal mortgage or HELOC, so not all banks will offer or be experienced with this product. If you have a local building contractors association, look up their membership list for bankers or lenders. I think you would find a local expert who already has a working/trusted relationship with the local building community.
The OTC loans work as a line of credit during constriction to pay the builder and subcontractors as the work is completed.. When the project is completed, they convert into your desired long term loan, fixed rate or ARM. Seek the HELOC after the loan modifies.
The tear down issue is not a deal killer as the cost to remove will be part of the cost breakdown of the project. The value of the finished home will matter, not what you had to tear down to build that home. This is all calculated upfront as part of the loan application.
Construction loans and hard money loans have similar rates, sometimes hard money side is more competitive if your LTV os low you might get in the 7's on a rate, I am a mortgage broker but only in CA and have seen 6.75 on hard money, but that particular program will not do construction,
We are buying in April 2020 a waterfront property in a resort area. The contract price is $1M, and we will have cash to complete the purchase. The property has a decrepit cottage that we will demolish in preparation for building a new home. We will not live in the cottage or on the property until the new construction is completed, likely more than a year from our April 2020 closing. While we have cash to buy the property, we do not have enough cash to build the new home without withdrawing a significant percentage of the needed funds from an IRA. We are old enough to withdraw the IRA funds without penalty, but to avoid a spike in our income tax liability, we are hoping to borrow $350K to finance that part of the construction for which we don’t have cash. In other words, we’d rather borrow $350K than withdraw it from the IRA. In googling around the internet, I found secured loans and construction loans that seem to top out at about $100K, with many companies offering far less. My impression is that we couldn’t get a “traditional” property mortgage since we plan to demolish the existing house.
We were hoping to get some kind of interim $350K loan to complete the construction, then pay off that loan with funds from a new, traditional mortgage from Quicken or another similar lender once we have moved into the new house. We also have an 80-acre farm that we own outright and that could be used for collateral. Philosophically, I like the idea of having a mortgage on my house.
Does anyone see a way that we could borrow $350K given our circumstances? Am I right in thinking that we couldn’t get a mortgage with plans to demolish the existing cottage? (The value of the property is entirely in the land – removing the cottage will cause the property value to increase slightly.) Are we making a mistake in paying cash for the property? I appreciate anyone who takes the time to reply to these lengthy questions, because I’m not sure where to turn.
Easy, go to a local community bank in the area and get a construction loan. They are not going to want you to do the end loan at Quicken however. If you are lucky, you might find one that offers “one time close” construction loans. If not, a traditional “two close” construction loan would be a good option as well.
Easy, go to a local community bank in the area and get a construction loan. They are not going to want you to do the end loan at Quicken however. If you are lucky, you might find one that offers “one time close” construction loans. If not, a traditional “two close” construction loan would be a good option as well.
This. Since you are paying cash for the lot that's your equity for the construction loan(the value of the lot). Basically you do draws and pay interest only on the amount you've paid the contractor. When you've moved in you roll the whole thing into permanent financing. If finding someone with such an operation locally is hard ask your builder, the builder's association or see if there is any bank sign outside any other buildings under construction. Interest rates are higher than permanent but interest only and very short term.
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