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Construction Loan, but did Cash-Out refinance in the past

4,230 Views | 14 Replies | Last: 7 yr ago by davido
Zeke1995
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Here's the situation. I call upon the combined power of TexAgs to see if there is an answer.

My wife and I have lived in our current house about 6 years. We love our lot and the neighborhood, but the house is showing its age. After looking at renovations of a 70-year old house, we compared to cost of construction, and decided to demo and re-build on our lot. I know, I know, it's some expensive dirt, but we really like the area.

We found a builder, tweaked the design, and executed a contract. We applied for a one-time construction loan with a lender, and all was looking well until earlier this afternoon.

Our current mortgage is a refinance we did to get the rate down from 4.875% to 3.6%. The lender did not realize it was a cash out refinance, and according to him, that kills any construction loan because some portion of the mortgage is a home equity loan, which can be harder on the bank. Options may be

(1) pay off current mortgage with cash or loan secured by anything other than the current house. Not possible or at least, very impractical or unfeasible.
(2) sell home to builder with agreement that they will sell it back to us. Not sure what my comfort level with that is.
(3) sell house and buy a different lot. Don't really want to go through this, not just because we like the current lot and pool, but we also want to avoid the fix up/show/sell/etc. process involved.
(4) ????

Anyone else ever run across this? At least one banker has told me that once there is any hint of a home equity loan, construction loan cannot be done, even if we paid back the cash out portion of the refinance (which we could do).

Thanks, I'll hang up and listen.
AggieMortgage
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What city is the home in? approximate cost and loan amount?

jja79
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Assuming you're in Texas we have very specific home equity laws unique to this state. Once you did the cash out loan any debt associated with the home is equity money. A title company guy might weigh in but I believe you'll have to pay the existing loan off, get a release and then proceed.
Zeke1995
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quote:
What city is the home in? approximate cost and loan amount?




We are in Houston. At time of refinance, house and lot appraised for $700k. Mortgage on refi was $417k, current balance is about $410k.

House held by my wife and I. One idea was to sell house to me, and then proceed with the demo and rebuild, but can't really pay that off in cash.
jja79
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That would not be an arms length transaction.

If I were you I'd speak to a title company attorney.
Jay@AgsReward.com
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In Texas, "once a cash out always a cash out". So, every loan that pays of all or a portion of that loan would by law be a cash out. So, it does not matter if you pay back the cash etc it will still be a cash out which will eliminate the ability to have a construction loan that pays off any your current lien.


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Zeke1995
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Jay, what about a construction loan that does not pay off any portion if the current lien? Of course, the trick would be finding a lender that offers that, and doing the demo/rebuild without the current lender objecting,etc.

Otherwise, I am slowly concluding I have screwed this up and have no portions other than to pay off the curent loan.
jja79
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I don't think anyone would subordinate to an equity loan.
Jay@AgsReward.com
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Yes, the subordination might be tricky although I do not think it would violate Texas cash out law, but I am not an attorney. The loan to value might be an issue as well depending on the construction cost etc. But, I will run up flag pole with some of my construction investors Monday.

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Zeke1995
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quote:
Yes, the subordination might be tricky although I do not think it would violate Texas cash out law, but I am not an attorney. The loan to value might be an issue as well depending on the construction cost etc. But, I will run up flag pole with some of my construction investors Monday.


I appreciate your checking into this. The irony is that my thought behind taking a cash out refi was that I could have some cash on hand to pay architects, earnest money for builder contract, etc. (we were still considering remodeling as an alternative then).

If you need any more details, please feel free to email me.

Edit: removed email address.

Thanks again.

[This message has been edited by Zeke1995 (edited 12/9/2013 12:02p).]
Jay@AgsReward.com
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Zeke,


I have some answers for you. I just sent you an email as well.

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CDavis
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I know this is an extremely old post but my girlfriend and I are going through this exact same issue. I would appreciate someone posting a reply with the answer/solution.

Or if Jay @ agsreward .com
would contact me with the information he gave to Zeke 1995 that would be awesome.

I appreciate any help anyone can provide.
jja79
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One time close construction loans are a big part of our business. I just confirmed with our underwriting manager the cash out loan must be paid in full to qualify for a construction loan.
evestor1
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Sorry to hijack

I have a cash out loan... Want to start over, but don't need a construction loan. Must I pay off loan and then start or can I just go about my biz. (My cash out loan in hardly worth the value of the land 350 land value, loan 220)
Jay@AgsReward.com
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CDavis,


You CAN legally get a construction/home improvement loan second on top of your current cash out. So, it can be done. However, the issue you are likely going to have a hard time finding a lender willing to give you a loan of that sort for the size you would need to rebuild the house. If you were just needing 50k to 100k to add some sq footage etc then that would be doable.
davido
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What about borrowing from a private lender (10-12% but for a short period of time), have them put a 2nd, then fund directly to 1st lender to almost pay off the first, then you pay the final payoff? That clears the 1st. Extra steps only for timing purposes, so payoff of first and filing of second don't lapse/overlap.

Would that clear it enough to get the construction loan, pay off the 2nd, then start the tear down and rebuild?

May cost you $5k-$10k for the private funds, but it seems like it would get it done.
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