Deciding to demolish a house may save you from some expensive renovations that seem too much to take on especially if your house is already a money pit. But, if you have a pre-existing mortgage on your house you are likely wondering if you can demo a house with a mortgage.
You are not legally allowed to demolish a home if you have a mortgage on it since the physical house acts as collateral for the lender. If the house no longer exists, then your lender would be in a bad spot.
We will let you know all the options that you can explore that will help you build your dream home. This can turn out to be a complicated process but there is likely an option that will suit your needs.
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Here’s a Quick Pro Tip!
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It all starts with having the right tools.
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1. 17-inch Ripping Bar – Perfect for lifting shingles and dismantling wall framing
2. Milwaukee Reciprocating Saw – For cutting pipes, lumber, and more
3. 24-oz Long Handle Hammer – Because you will need a trusty hammer that can break through anything
Can I Demolish a Home If I Have a Mortgage on It?
By law, you are not allowed to demolish a home if you have a mortgage on it. Your house acts as collateral for the lender while you are still paying off the mortgage. If the house no longer exists, then the lender will not have collateral which is something they have to avoid.
Therefore, your lender will not allow you to demolish your house if you have an existing mortgage on it. However, there are other routes you can explore that will allow you to demo your house even with an existing mortgage.
Can You Demolish Your Own House if You Have a Mortgage?
Technically, you are not permitted to demolish your house if there is an existing mortgage on it. However, there are some other options for you that may be worth exploring.
You should speak to your lender and let them know what you wish to do. They may allow you a construction mortgage once you have paid the first installment of the regular mortgage if you have recently bought the house.
Another option is to start a new mortgage while also paying for the old mortgage. This is a more expensive option but it will allow you to build your dream home.
Can You Rebuild Your House if You Have a Mortgage?
If you have an existing mortgage on your house, you can’t simply demolish the house and then rebuild. The house acts as collateral for your lender and your mortgage agreement states that you have to keep the house intact while under the contract.
However, there are options for you. What you should do first is talk to your lender and let them know what you would like to do.
Opening up communication with them will hopefully make things easier for you and they may have some helpful options.
Mortgage Considerations When Rebuilding
Your mortgage is something you have to consider if you want to rebuild your house. Unfortunately, you are not legally allowed to demolish your house if it has an existing mortgage on it.
However, there are other options you can look into. You can decide if you want to pay off your mortgage and then enter into a construction mortgage.
This mortgage will finance your demolition and rebuild and then will be your new mortgage once the construction is done.
Can You Pay Mortgage While House Is Being Built?
If you are building a new house, you will likely need financial help, unless you have a ton of extra cash. You can enter into a construction mortgage, which offers you financial lump sums in stages during your construction process.
When you receive a construction mortgage, your lender will provide you with the financial help to build your home. Once the construction is complete, the construction mortgage will then turn into a regular mortgage.
Can You Knockdown and Rebuild a House With a Mortgage?
You are not legally allowed to knock down and rebuild a house that has an unpaid mortgage on it. The physical house acts as collateral for the lender and without it, the lender would be in trouble.
So, your lender will let you know this is not possible. However, there are other options for you.
You can take out a construction mortgage to essentially pay off your existing mortgage and then finance your new build. Once the construction is finished, the construction mortgage will turn into your regular mortgage.
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Is It Illegal to Demolish a House With a Mortgage on It?
It is indeed illegal to demolish a house with a mortgage on it if you did not speak to the lender in advance. You may be able to come to an agreement with your lender and perhaps enter into a different type of mortgage.
If you are planning to demolish your house with an existing mortgage on it, you should always speak to your lender first. This will let them know exactly what you are planning and they will help you find a financial solution.
Are There Consequences to Demolishing a House With a Mortgage?
You could definitely get yourself into a lot of legal trouble if you choose to demolish your house that has a mortgage on it since you entered a binding contract with your lender that states your house must remain intact until the mortgage is paid off.
Once your lender finds out that you demolished your house without their permission, they may seize other assets of yours that equal the value of the mortgage you had left on your house.
You may also lose your property and face other legal actions since you broke your loan agreement.
How Can I Demolish My Home That Has a Mortgage?
There are a few options that exist if you want to demolish your home that has an existing mortgage on it but the first thing you should do is speak to your lender and let them know you are thinking of demolishing your home.
Your lender will let you know what is possible for your unique situation. They may suggest you completely pay off your mortgage before you start the demolition process.
Or, they could offer you something called a construction mortgage which is basically enough money to pay off your existing mortgage, fund your construction, and begin a new mortgage.
This is a complicated process but may be worth exploring.
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Building a New Home With an Existing Mortgage
You are legally allowed to build a new home while you pay off an existing mortgage. But, you are not allowed to tear down a house to then rebuild it if you have a mortgage on that house.
In all other cases, building a new home while you have an existing mortgage is totally allowed. You may even be able to get a second mortgage that funds your construction and then transfers into a regular mortgage once the construction is complete.
What Happens to My Mortgage if I Rebuild?
You will have to speak to your lender if you are choosing to rebuild your home that has a current mortgage on it. You are not legally allowed to tear down your house and rebuild if you have an existing mortgage.
Your lender will likely tell you that you have to pay off your mortgage or take out a construction mortgage to pay off your existing mortgage and then enter into a new one while funding your construction as well.
How to Finance a Teardown and Rebuild
You can receive a construction-to-permanent loan to finance your teardown and rebuild project. Or, you can receive a construction-only loan that only covers the cost of the construction.
The construction-to-permanent loan is the most popular strategy in this situation. You will receive the finances to fund the demolition and rebuild and then your loan will be converted to a traditional mortgage.
How Do I Get Money to Rebuild My House?
You have a few options to receive money to rebuild your house. You can receive specific construction loans that turn into a mortgage or are just loans. Or, you can take standard loans or a HomeStyle loan.
You should speak to a trusted lender in your community to figure out the best strategy for your needs. But, keep hopeful because there are a lot of options for you, whether you want to take out a standard loan or a construction loan that converts to a traditional mortgage.
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What Kind of Loan Can I Get To Rebuild My House?
There are several types of loans you can receive to rebuild your house. There are specific construction loans that just cover the cost of building, or there are loans that transfer into traditional mortgages.
You should consult with a trusted lender to decide which loan is best for you.
Here are some loan options that you can mention to your lender:
- Standard 203(k) loan
- HomeStyle loan
What Is a Construction Mortgage?
A construction mortgage allows you to draw out money from the overall amount of the mortgage in stages as you build your house. The remainder of the mortgage transfers into a traditional mortgage once the construction is done.
This loan allows you to finance your new build and then have a mortgage after without having to sign into a new mortgage.
You will have to provide a first advance if you already own the land you are building on and if you don’t own the land yet, a first advance is available to help you purchase the lot.
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What Is a Construction Loan?
A construction-only loan covers the cost of a new construction. The loan must be repaid at the end of construction. You will undergo credit-score eligibility checks and will require a down payment.
You will likely have to provide the lender with documentation including building plans, site measurements, and financial documentation. You also may be forced to partner with the lender’s preferred design/build firms.
Mortgage to Demolish and Rebuild
You can receive a mortgage called a construction-to-permanent mortgage that finances the demolition and rebuild of your house. The loan will then be transferred to a traditional mortgage once the build is complete.
This is a very popular option among people wishing to demolish and rebuild their home since the construction will be financed and then they don’t have to go through the trouble of getting another mortgage after the construction is finished.
Do I Need to Tell My Bank That I Am Demolishing My House?
If you have an existing mortgage with your bank on the house you are wishing to demolish, then you absolutely have to tell your bank. If you don’t then you will face some serious legal problems.
When you signed in to your mortgage contract, you agreed to keep your house intact until the mortgage is paid off or tell the bank if you have any plans that may breach the contract. Therefore, it is in your best interest to let your bank know and then discuss your options.
Will My Bank Give Me Permission to Demolish My House With a Mortgage on It?
It is always possible that your bank will give you permission to demolish your house with a mortgage on it. Depending on the bank and your specific situation, they may allow the demolition if you provide them with enough plans.
The bank may ask you to provide financial evidence that you can afford the demolition and rebuild. They will also ask you for building plans and any contracts that you have started with contractors.
You will also have a better chance if the value of your house will be greater than it is now after the rebuild. Regardless, you should open up communication with your bank about your wishes to come to a solution that meets your needs.
Do I Need Two Mortgages to Build a New House?
It is possible that you will need two mortgages to build a new house. If you have an existing mortgage on a house, you are not allowed to demolish the house until your mortgage has been paid off.
If you cannot pay off your mortgage, then you might be able to enter into a new mortgage that will cover the cost of your old mortgage plus the cost of your new build. That new mortgage will then transfer into a traditional mortgage once the build is complete.
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Can the City Demolish My House?
A city has the right to demolish a house if it is being neglected or causing a health and safety risk to the surrounding area. However, the city will try its best to come to an agreement with the owner before they take action.
It is unlikely for a city to demolish a house other than that reason. Cities cannot displace people from their homes unless they have sound reasoning and that is typically only if the house is abandoned or extremely neglected.
Can I Buy a House and Rebuild It?
You can absolutely buy a house and rebuild it but if you take out a mortgage on the house, you have to let your lender know your plans as soon as possible.
If you take out a mortgage on a house that you are planning to rebuild, let your lender know as soon as possible as they may have better options for you. You may be able to pay the first payment of your mortgage then start demolishing and rebuilding.
How Much Will It Cost to Demolish My House?
The cost to demolish a house will depend greatly on your methods and where you live. Generally, it can cost anywhere from $3000 – $18,000 for a 1500-square-foot home. Per square foot, it costs around $2 – $17.
You should be prepared to spend a maximum of $20,000 to demolish a house. The cost will all depend on the equipment you purchase, the cost of contractors, the cost of dumpster rentals, and many other specifics.
Although it may seem complicated to demo a house that has a pre-existing mortgage on it, it is possible and you shouldn’t give up on building the dream of your house.
You should speak to your lender as soon as you can to figure out what options are available to you. If they don’t provide you with good news, then don’t be afraid to speak to another lender. They may have more flexible options.
No matter what, do not just go ahead and demo the house without speaking to your lender as this could land you in some serious consequences including losing your property.