Second Mortgage For Tear Down
Ask the Real Estate Lawyer: Real Estate Law Q&A
REM #LAW 732
By Ilyce R. Glink and Samuel J. Tamkin
Summary: A homeowner is thinking of getting
a second mortgage to finance the tearing down and rebuilding of her home. This
will put her initial mortgage at risk of being called due. Ilyce and Sam suggest
talking with several local mortgage companies to determine what options this
homeowner may exercise.
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.
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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
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
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.
Samuel J. Tamkin is a Chicago-based real estate attorney. Ilyce
R. Glink’s latest book is 50 Simple Steps You Can Take To Sell Your
Home Faster and For More Money In Any Market. If you have questions for
them, write: Real Estate Matters Syndicate, PO Box 366, Glencoe, IL 60022
or contact them through Ilyce’s website www.thinkglink.com