Subdividing with conventional mortgage loan

[Zachary Sakena]

Hi everyone have read some blog posts but wondering if anyone has came across this subdivision scenario.

I have a SFH that is valued around 325k. I have over 50% equity in the home currently. I am in process of subdividing the lot currently to build a new SFH for myself and keep the existing home as a rental. Hearing date by city for official approval or denial is in august.

My current loan has about 145k left on it with a 3% mortgage.

ideally would like to subdivide keep my existing mortgage on my current home and not affect the rate then get construction loan for new build. By subdividing, this would barely affect my current property value for the home.

how should I approach speaking to the mortgage company about this and what are my potential options.

Thank you to anyone who has any experience on this topic. 

[Jason Wray]

Zachary,

If you lived in the home for 12 months you really do not need to worry about the mortgage company. The only time you need to worry about a refinance or a "Change" in occupancy is if the loan is an FHA, VA, DPA (Down payment assistance) program, Fannie/Freddie Home style that you have lived in less than 12 months. Since you have a conventional loan if you lived in it for 12 months your all set.

The hard part is going to be convincing the new bank/lender that you are going to be building a Primary residence that close to your "existing" home. I can tell you from experience the real challenge is the distance between the lots/homes. Keep in mind the reason why it's usually denied is because a lot of investors buy a bigger lot to in fact build more "investment" rentals on the other lots, but say it's going to be a "new primary home" to get the higher LTV/LTC to build.

If you’re willing to put 15% to 20% down you will not have that problem but if you’re looking for a 10% down or less it’s going to be a very "Hard sell" to the underwriter. Again the reason why is the distance between the new home and the fact that it’s on your soon to be subbed parcel. It can happen but you need to have a seasoned Banker or Loan officer with very lien ant construction underwriters.

You will need a solid and very descriptive "LOE" letter of explanation and make sure you’re not trying to build a 2-4 unit or a smaller home versus the current homes GLA/SQFT or it will "Not" get approved. The underwriter will require this home be superior in nature to the "exiting" home for a reason to build as a primary. They will not let you build a smaller home or something inferior because it will look like your downsizing.

This is tougher to explain in detail so if you have any questions feel free to reach out I enjoy helping and talking REI!