Owner Financincing With Grandparent And Building
Hi - my grandmother is owner/financing a 1.25 acre parcel in front of her to me and my husband. She then is willing to apply for a line of credit on her house to finance the construction of the home. Once the home is complete, we plan in refinancing to pay off the land and the construction costs. Does this typically work? Her house is paid for completely, and the entire family knows what is going on and in agreement.[ Edited by kberryman on Date 06/21/2004 ]
From a business perspective it should be fine. If there are other grand kids or family issues it might get sticky.
Sounds like you might want to build your credit, so you might look at being one of the borrowers earlier the the refi.
Make sure things ar clear as to what happens if your grama passes in the mean time.
I would suggest that you have your Grandmother give you a subordination agreement in the loan she is taking back. Then you go into the bank and stand alone and get your own financing to build. Make you look great and frankly dear friends, it might jprevent an enraged family member from sayng nasty things about you when that great day comes and Grandmother is no longer here to tell the true story of this event.
Cheers Lucius
Lufos - What do you mean by subordination agreement? I'm not quite sure I follow what you are suggesting. We will have a contract agreement with her setting the terms for owner financing the land to us. Since her land and home are paid off, she would essentially be obtaining a reverse home equity line of credit to build the home on the land we are owner financining through her. Our contractor did this when he built his daughter a home. He bought the land, owner financed it to his daughter, then took out a line of credit to build the home. When the home was finished, his daughter refinanced to pay off what she owed him for the land and what the total cost to build the house. I'm just wondering if this works with people who are not contractors?
[ Edited by kberryman on Date 06/21/2004 ][ Edited by kberryman on Date 06/21/2004 ]
The financing will work the same. I think Lufos was suggesting to get your own loan and build your credit.
I don't know much about reverse mortgages, but make sure you have the chance to pay it back b4 the bank takes the house. If grama passes suddenly how would this be accomplished?
Hello kberryman,
I think the wise choice here would to do as Lufos suggested and have her subordinate the lot, meaning she would take second lien position to your new construction loan. You could also have your grandma transfer the title to your name then use the land as equity to secure your construction to perm loan (one loan, one closing). This would be much simplier and you would not be putting your grandma's house at risk if something were to go wrong and believe me in construction a ton can go wrong. There are many options in the way of financing, such as local lumber yards, mortgage brokers, ect. You should have no trouble getting a loan with nothing out of pocket if you can use the land as equity and your credit is decent. Good luck.
Hi TomC_MI - Yes, my husband and I had originally planned on what you have suggested...my grandmother would've held the note on the land, and then we would've obtained a construction loan to pay for the land and the construction. However, my question is, if the land is not paid for (i.e. she is owner financing it, so we will still owe money towards the purchase of the land,...we would not own it outright) how can we use the land as equity on the loan? Isn't it right that there would be essentially no equity in the land because we would still owe her for the full price when we went to apply for a construction to permanent loan? We have excellent credit, so that is not a problem. The home we currently own is also co-owned with my sister and brother-in-law,. We also have only owned it for 2 years, and our loan is an interest only loan. My grandmother has a living trust, so if anything happened to her, my mother and aunt would then be the ones in charge of everything in her trust.
My grandmother is also selling us the land for under market value. So does this mean that the land has what I have seen is called "built-in" equity? Could we use this as a down payment on our construction to permanent loan?
Without a subordination agreement it will be hard to get a loan to build a home. This is so because any loan would be a 2nd (behind the 1st you gave to get the land).
If you could get a second, it will cost you a lot more and have less favorable terms.
A subordination agreement means the the 1st will become a 2nd when you get a loan to build the home.
Good Luck
BOB FORD
**Please See My Profile**
Quote:
If your grandmother trusts you, which I am assuming she does as she is willing to finance your project, then she can sign the title over to you, say you paid X dollars and then you have your equity. For that matter, not that I have had an opportunity to try this, but I would think if she signed the land over to you and it was worth $50k or whatever that you could use that as your equity. Then again the bank might not feel you're risking anything...I dunno. I'm no expert but I do know the first option works well 
On 2004-06-22 10:55, kberryman wrote:
Hi TomC_MI - Yes, my husband and I had originally planned on what you have suggested...my grandmother would've held the note on the land, and then we would've obtained a construction loan to pay for the land and the construction. However, my question is, if the land is not paid for (i.e. she is owner financing it, so we will still owe money towards the purchase of the land,...we would not own it outright) how can we use the land as equity on the loan? Isn't it right that there would be essentially no equity in the land because we would still owe her for the full price when we went to apply for a construction to permanent loan? We have excellent credit, so that is not a problem. The home we currently own is also co-owned with my sister and brother-in-law,. We also have only owned it for 2 years, and our loan is an interest only loan. My grandmother has a living trust, so if anything happened to her, my mother and aunt would then be the ones in charge of everything in her trust.
Hello K,
I guess you have to think creatively here
I actually know of a program (maybe I already said this but I am too lazy to check my last post) where if you can get the owner to subordinate the land that they will use the value of the land as your downpayment...hence virtually no money out of pocket. Building takes creativity unless you have fat pockets....
Ok, here how a subordination agreement works: Grandma sells you the land with a warranty deed and a mortgage-- not a land contract. She agrees to subordinate her loan to your new first. In other words, even though her loan was made first in time she agrees to make it a second mortgage. This means you can go get a new first mortgage for the cost of construction of the house in your name. In this way the bank can use the value of the land as equity in their loan calculations and gandma is not in the position of "giving" you the land on paper and expecting to get paid at some later date. Also this keeps the new mortgage out of grandmas name so her liabilty is less in the event that you totally screw up the new construction. Finally the estate planning gets easier because if Grandma wishes to she can leave the 2nd mortgage to you in the will thus making the "gift" of the land a reality. Or she can leave the mortgage to other heirs and your payment goes to them thus making it less likely that they would be angry at you for taking advantage of grandma and shorting them on their inheritance.
Thanks for all the advice. It may turn out that due to my grandmother's age and income level, she may not qualify for a high enough line of credit to finance the construction. My father told me that they only qualified for $100K HELOC because they still owed $20K on their house and have a $25K car loan. My father has a higher income than my grandmother, so this is why we think she may not qualify for a high HELOC limit.
Another suggestion my grandmother had was to gift deed us the land. Then we would own the land free and clear. We would then be able to obtain financing by using the land as collateral for a construction loan.
My husband and I want to pay her for back for the land, because we don't want to just receive it as a "gift". We won't have the money to pay her back completely when we sell our house, so my next question is:
If she were to gift deed us the land, and we used it as collateral on a construction loan, do lenders allow borrowers to borrow more on the construction loan to pay off other debts or to finance things like landscaping (essentially it would be like refinancing, borrow more to consolidate other debts)?
Or do you suggest refinancing at a later date to consolidate debts?
We were thinking if we could obtain a construction loan that allowed us to consolidate debt, this would be a way for us to pay her back for the land that she gift deeded to us. We don't feel comfortable just accepting something without paying for it and don't want our other family members to feel slighted, thus the reason why we want to purchase the land from her in some way, while still keeping our construction loan to a minimum. We plan on using profits from the sale of our house as a down payment to my grandmother for the land. The remaining amount we would owe could be paid to her after we close the construction loan, if they allow borrowers to borrow more to consolidate debt.
Any advice would be great.
Thanks.
"100% Construction Financing up to $500,000"
I have applied to this lender before. They also have accqusition/construction loans where you have one loan, and the 1st draw would be to pay your grandma for the land..
cjmazur - which lender is this in particular? Does it have a name? Thanks.
I have had numerous posted deleted for "advertising" (I think we have an over zealous moderator or 2), if anyone wants the name, pls. PM me