To acquire a mortgage for a new building, does the title for the land it will sit on be free and clear?

Question

I own 50 acres of land (a 40 acre parcel and a 10 acres parcel with separate tax ID numbers, but which were purchased with one mortgage). The house and buildings sit on the 40 acres. The other 10 are unimproved Ag zoned. I want to put a business on the adjoining acres, including putting up a new building. I want it to be separate from my home, and I want to be able to sell it separately, perhaps, in the future. If I want to get a mortgage for the new building, do I have to separate the 10 acres from the other 40 so that the 10 acres has a clear title? What are the chances that my bank will do this for me (I have paid 5 years of a 15 year mortgage - I had originally put down 20%). How should I negotiate this wtih the bank for the best possible outcome which is to get a clear title on the 10 acres without paying too much or anything.

The land was subdivided prior to my purchase - separate tax parcel numbers, so that's not an issue. I just have one mortgage for the two pieces of propery.

I may be able to have access to inheritance money via my father - who is willing to hold the mortgage on the building for me. So, I do not necessarily want the same bank that holds my current mortage to loan me money for the new building. That's why I want the title to that parcel free and clear. My father said he can only offer a mortgage on land that has a clear title - that's the point of my question. I did not ask him his source (probably his banker attorney who would work out the mortgage deal). I'm trying to set myself up for the best negotiation at my bank, to get the title clear for the 10 acres without securing a new loan with them - but they do not have to know I will or won't use them for the additional business.

Answer 1

You will have to subdivide it. The bank won't be able to perform the subdivision, but they shouldn't have any problems with you improving the land. If you don't want them to have the ability to take this portion of the property if you ever default on the loan, you should ask them to release that portion from the collateral. Most banks will oblige on this as long as the LTV (loan to value) does not exceed 80%. Since you are a third of the way through the mortgage, that shouldn't be a problem. It would probably be best to talk to someone in the mortgage department at your bank and explain to them what you want to do. I'm sure an acceptable agreement can be reached.

Answer 2

Your bank will do anything you want, because if they don't you can go to another bank & get another mortgage to take theirs out. They will probably be happy to give you a new loan on the 10 acres themselves & you can save some costs because they already have the title work done & have lien priority. The new loan can be subordinate to the first, or they can release the 10 acre parcel & have a new first. Most likely they'll suggest just modifying the existing mortgage to increase it cover a new note for the sum you'll need. (This is called an advance) Your old note probably has a very low interest rate & the bank may suggest replacing it with a combined new note at a new higher rate. Tell them you want to keep the old rate & just have the new rate on the new funds. Depending on how tough a negotiator they are & how tough you are, they may back down, or you may back down or you may "blend" a compromise rate. If you are a good borrower (ie, never late) & are planning to a start a new business on land in which they have a secure loan, they are not going let you walk over to their competitor's office without doing everything they can to keep you. You will always be able to sell the business & 10 acres separately when the time comes -- the new buyer will take care of that. Right now you want the best deal for yourself.

Answer 3

You can't get a clear title on the 10 acres until you have paid off the original loan. You need to talk to your lender and tell them you want to build a building on the property and apply for a loan to have it built.

Answer 4

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