Demolishing single family home with a mortgage

[Paul Brady]

Rookie question : If I were to try to develop a couple duplexes on land where a small single family currently sits (demolishing the current home in the process) would the bank call the loan since the house in demolished ?

[Randall Alan]

I'm going to say that wouldn't work...  First off, liens are filed on properties when there is a loan.  Every primary lender usually requires that they sit in first position on their lien.  The previous lien on the existing loan would sit in first position on that parcel of land.  The lender on your new build would run a title search and demand that the previous lien be cured (paid off) before they would lend you the money for the new build on that parcel... otherwise the old loan could take possession of the new buildings on the property, which your new lender would not allow. 

Even if you were doing a cash buy on the new builds, what would definitely happen is that you would run into insurance issues.  In addition to a more traditional 4-point inspection, (unbeknownst to many homeowners)  insurance companies have properties inspected on a random basis to make sure they are being kept up and also to make sure there are no dangerous situations on the property - such as trampolines, dangerous dogs, etc.  We have had rental properties of ours dropped from insurance for both those reasons from exterior drive-by inspections.   

Any mortgaged property is required to be insured.   In your scenario it would be hard to inspect what wouldn't exist... so without an inspection, you would not be able to get insurance, and the lender would be notified and want to 'force place' insurance on the (non-existing) structure.  Force placing insurance costs about 3-4 times the cost of regular homeowners insurance.  Things would continue to go downhill from there.   

The better way to do what you want to do would be to refinance the previous mortgage into your new mortgage on your new build if the numbers allowed for that.  

All the best!

Randy

@Paul Brady