If you’ve ever felt the disappointment of finding a large piece of land in the perfect community, but the house found in it is sadly dated, too small, or simply not your style, you’re surely not alone. For many first-time or repeat home buyers, location is an important factor when buying a home. If you have your heart set on a particular lot, you might consider whether a demolition option is right for you.
For many homeowners, choosing the ideal location that suits their current and future needs is worth the process of buying a home (and land), tearing down the structure, and rebuilding an energy-efficient or updated model. In the long run, you can save service and repair costs, depending on the age of the structure and its current level of functionality. If the home is not structurally sound, not built for safety in hazardous weather conditions, or is in ruins, it can be difficult for the seller to take it off the market at any price.
If you decide to buy a demolished house, you will need to take into account the financial aspects. Financing a demolished home is a bit more complicated than that of a standard mortgage, as the process involves destroying the mortgage by demolishing the house.
Lenders want to be sure that in the event of default, they will be able to foreclose on your home and keep your assets. If the house is demolished, they have little or nothing to recover if the new house is not completed. Not to mention that, in many cases, if you make changes to your home that decrease its value, it can become a legal problem with your mortgage lender. It’s best to be honest and frank with your lender, who can advise you on your options for financing your reconstruction project.
I’ve put together a short list of financial considerations to keep in mind when deciding to buy a demolished home and rebuild it. It includes ideas and options for financing the purchase of the demolished house, its demolition and the costs of new construction. Of course, you should also consult a loan expert before making any major decisions.
Before You Buy: A Checklist
Before making any move in buying a property, be sure to take these initial steps.
Check Your Credit Score
This is the newsletter of a lifetime. Reviewing your credit report before making any construction plan or meeting will save you an immense amount of time, money, and stress. Being aware of your credit will help you determine which loan products you may be eligible for and what options are available. You certainly don’t want to pay someone to do your new home designs before you know your credit makes you eligible for a loan.
Count Your Savings
Regardless of which loan option you choose, you can anticipate upfront costs and out-of-pocket expenses. Make sure you have enough cash to cover any additional costs, such as bank fees, loan expenses, home design plans, and anything else that is needed before meeting with the lender.
Pagar los Importes Pendientes del Préstamo
It may be the case that the demolished home is owned by you or a family member and has an outstanding mortgage balance. In most cases, you will not be able to demolish a home for which a balance is owed. Make sure the home is your property by paying the remaining balance in full, if necessary.
In some cases, if the outstanding balance is minimal, you will be able to get written permission from your lender to transfer the balance owed to your new mortgage. But keep in mind that lenders will not grant permission if your balance is greater than the value of the land, which will be the only net worth after the destruction of the home.
Consider Your Options: Total Demolition or Substantial Renewals
It’s a good idea to have a construction expert visit the site to determine how much work will be needed. Some homes may require complete demolition, while others may be substantially renovated. Some counties and areas have demolition codes and regulations that could complicate the process and lengthen timelines. Other areas can encourage substantial renovations with special loan products and tax incentives.
Acquisition of a Demolished House
As noted above, buying a home in order to tear it down is complicated. You may be able to negotiate with your lenders using other collateral, such as your current home or a lump sum of savings. A combination of capital and cash can be a practical solution.
It is also possible to use the proceeds from the sale of your previous home and condition the purchase of the demolished home on that sale. The seller may or may not agree, but it is worth a try.
Demolition
Depending on the size of the home, the location, and the methods of removing certain toxic materials, such as asbestos, demolishing your home can cost anywhere from $5,000 to $20,000. Before calling the excavator, check with the local authorities first if there are any necessary inspections or supervision that need to be done. In addition, you may have to pay to obtain permits and secure the site during demolition.
However, if you do not plan to save several pieces of the house and recover part of the cost, there are some ways to get rid of the house for free. You can donate the house: someone may want it! If they are willing to pay the costs of moving, hiring a professional company to load the house onto a flatbed truck and take it to a new location is an easy solution. Or, you can donate the house to a local fire department to start a controlled fire. This can be an ideal training tool for firefighters who need to learn how to properly extinguish a fire.
Loan Option No. 1: From Construction to Permanent
The first step to financing is to contact your trusted local lenders to find out what types of loans are offered for reconstruction and renovation costs. Not all lenders offer the same products, but below you will find the three most common.
Construction-to-home loans are the most popular for these types of projects. Buyers of demolished homes use a construction loan to cover demolition and reconstruction expenses. At the end of the project, the loan will become a permanent mortgage. These loans can be termed “single closing” as they eliminate separate construction and mortgage closings, saving the buyer thousands of euros in closing costs.
As a general rule, a demolition and reconstruction project should result in a new house of at least two to three times the value of the original demolition. Lenders will consider whether the value of the projected finished home will be adequate to support the full of your new permanent mortgage. If you default on the loan, the lender can recover the outstanding balance by selling the property.
Loan option No. 2: Construction only
A construction-only loan is a short-term loan that only covers the cost of new construction. There is no option to combine this type of loan with mortgage payments and it must be paid in full when construction is finished, usually through a traditional mortgage. As with all mortgages, credit score eligibility, debt-to-income ratios, and required down payments vary by lender.
With any construction loan, it is common for lenders to require supervision and approval of all construction plans, ground measurements and financial documentation, and to partner with preferred design/construction companies.
Loan option nº 3: Renovation-construction
A renovation-construction loan covers the costs of major (or minor) renovations of a home. It can be combined with the purchase price to obtain a single loan. If you decide to buy a second-hand home and make substantial renovations instead of demolishing it, a renovation-construction loan may be the best option.
FHA 203(k) and HomeStyle loans can be used for major structural repairs and/or cosmetic renovations. You have the option to add up to six months of mortgage payments to the loan if you are unable to occupy the structure during renovations. Funds are deposited into an escrow account and paid to contractors in sweepstakes as they complete project milestones.
Standard 203(k) Loan
The FHA standard 203(k) loan is available to borrowers with a minimum credit score of 500. The required down payment decreases with a higher credit score. These loans cannot be used for anything that the FHA considers a luxury. Therefore, you cannot install a jacuzzi or a luxury outdoor sound system with the bottoms. A 203(k) loan is strictly for a primary residence and cannot be used for a vacation home. You can use a 203(k) loan to tear down and rebuild a home, as long as the foundation remains intact.
HomeStyle Loan
Fannie Mae HomeStyle loans are available to borrowers with a minimum credit score of 620 and require a low down payment. HomeStyle loans only work for homes with substantial renovations; Demolished houses are not eligible. They can be used for second homes or investment properties and have fewer restrictions on permitted renovations.
Build Your Dream Home
Starting with a little research, you can get a basic idea of how much demolition and reconstruction can cost and how much budget you have. Once you have a preliminary outline, it’s a good idea to engage with a trusted builder who can advise you on cost specifications and timelines. When you’re ready, arrange a call with your lender and/or loan counselor to go over any questions and make sure everyone agrees.