SB 9 Lot Splits and Mortgages

July 13, 2022

Learn how an SB 9 lot split affects your mortgage.

Many California homeowners are excited about splitting their lot with Senate Bill 9, but wonder if it’s possible to do so with a mortgage. This article answers some of the most common questions about SB 9 and mortgages and walks you through the best options for splitting your lot if you don’t yet own your property free and clear.

SB 9 Lot Split Mortgage FAQ

Q: Can I do an SB 9 urban lot split if I have an existing mortgage on my property?

A: Yes, you can use SB 9 to split your lot if you have a mortgage.
The process is easier if you own your property outright, however.

Q: Do I have to get permission from my lender before splitting my lot?

A: Yes, you will need to get permission from your mortgage lender before pursuing an SB 9 lot split.

If you split your parcel without explicit consent from your lender, it would be considered a violation of the lease agreement. In that case, the lender could demand immediate repayment of the mortgage loan in full.

Q: What are the options for splitting my lot if I have a mortgage?

A: Essentially, you have three options: a partial release of mortgage, a mortgage refinance, or paying off your mortgage.

1. Get a partial release of mortgage

A partial release of mortgage allows you to proceed with a lot split while keeping your current loan and lender.

How does it work?

Each lending institution has different standards and requirements for partial release of mortgage. The process will also involve an appraisal and a significant amount of paperwork.

Our lot split clients have had success getting a verbal agreement from their lender and presenting the approved lot split plan for written sign-off.

Note: Some mortgage lenders won’t allow a partial release (as dictated in the fine print of the mortgage contract).

What are the qualifications?

It depends on your mortgage provider. Regardless of your provider, your mortgage must be at least one year old.
Here are requirements from some of the major lenders:

  • Fannie Mae requires a final LTV of less than 60%
  • VA (Veterans) Loans require a final LTV of less than 80%
  • USDA (US. Dept. of Agriculture) Loans require that all profits from the resulting sale of land must be used to help pay off the loan principle or to improve the property.

What if my lender won’t agree to a partial release?

If you don’t meet the qualifications for a partial release—or if your lender or loan doesn’t allow them—you’ll need to refinance your loan.

2. Refinance your mortgage

If your lender won’t agree to a partial release (or if your LTV is too high), you can refinance your mortgage with a different lender.

How does it work?

When you refinance a mortgage, you essentially get a new mortgage to pay off the old one. This is a necessary step if you want to split your property using SB 9 and your current lender won’t give a partial release of mortgage.

Note: Since you’re getting a new mortgage, you’ll also get a new interest rate (and it may be higher than your old one). The better your credit score and lower your debt-to-income (DTI) ratio, the better your rate will likely be.

What are the qualifications?

Just like when you applied for your original mortgage, you’ll need to have good credit and a low DTI. A mortgage refinance requires an application, underwriting process, and closing—just like a regular mortgage.

What if I don’t qualify for a mortgage refinance?

If your current lender won’t agree to a partial release of mortgage and you don’t qualify for a refi, your best hope is to pay off your mortgage.

3. Pay off your remaining mortgage with a hard money loan

If all other methods fail, you can get a hard money loan to pay off the remainder of your mortgage. However, you’ll need to weigh the cost of the loan against the projected profits from the sale of the new lot to make sure the numbers pencil out.

How does it work?

Unlike mortgages, hard money loans aren’t issued by banks. Individual investors, investing groups, and financing companies are the usual providers of hard money loans. And unlike banks, the loan amount is determined not by the applicant’s credit history, but by the potential value of the property investment.

If you’re not too far off from paying off your mortgage, you might consider getting a hard money loan to settle the remaining loan balance and help fund construction (if you’re planning to develop the new lot after splitting it).

What are the caveats?

Hard money loans are considered risky, as interest rates are usually much higher and repayment terms are much shorter than with a conventional mortgage. If you choose to take out a hard money loan, you’ll want to proceed with caution and be sure you can pay the loan off quickly.

Conclusion

While it’s certainly less complicated to split your lot if you own it outright, it’s still possible to do it with a mortgage. As a general rule, the lower your LTV—that is to say, the more of your loan you’ve paid off—the easier it will be.

If none of these options work for you, you may need to hold off on splitting your lot until more of your loan is paid off or you can qualify for a refinance.

Keep in mind that you don’t need permission from your lender for the duplex/two-unit provision of SB 9. If you keep your lot intact, you can still use SB 9 to build a second unit, without getting your lender involved.

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