Secure financing with an existing house

Hello,

I am also considering building my own house. But before that, I wanted to know if I even have the possibility of financing. Because unfortunately, during the first house viewing in a show house, I was unpleasantly made clear that I could forget it. I still hope that this is an isolated case.

I am self-employed and, according to my bank, belong to a group not recorded in my industry, so there is no score available for me, which makes granting a loan very difficult. However, I have not yet discussed construction financing with my bank.

For my project, I need €270,000, which I could secure with an existing 3-family house, rented in a prime location, with a current market value of €280,000. Rental income from this is €1,350 cold per month, from which I could also service the loan. In addition, of course, the house to be built with a granny flat.

Does it really look that bad?

Thanks in advance for your help.

Best regards Patrick

Hello Patrick,

without knowing your further personal circumstances exactly, self-employment per se is a thorn in the side of most banks, as it carries many risks for which you are already liable. This means your bank basically considers the security you can personally provide as negligible.
This means you need a long-term proven top result from your entrepreneurial activities and few business risks to convince the bank.
It looks different with limited liability. As the managing partner of your own GmbH, the security you can personally provide is again free from the bank's perspective. ;)

You want to include an existing rental property as additional security. Here too, of course, location, the city, surrounding infrastructure, and the economy decide. The bank may even require an appraisal from you. Tip: If you have the option to provide the apartments individually as security, do not automatically use all apartments as collateral. For example, one apartment can then be either your iron reserve in case of emergency or additional bargaining material if you want to extend the loan in a few years...

It is best that you go to your house bank to explore the possibilities for the framework of a construction loan. They will then set a limit for you. Introduce your collateral from the existing house only in the further course of the conversation and improve the bank’s first offer with it.

To what extent it is possible for you to take out €270,000 also depends on your regular income, the type of self-employment, whether children exist, a partner who could be liable, the planned property, your contributed equity, etc. A general statement is hardly possible without further information. However, the security in the form of an existing property is already a huge asset that you put in there. In my opinion, it should not fundamentally fail.

Best regards

Hello,

...It is different with limited liability. As managing partner of your own GmbH, the security you can personally provide is free again from the bank's point of view. ;)

I generally stay out of threads about financing questions because there are moderators in the forum whose daily job is dealing with this type of question...

But the statement above is not correct. It is a widespread misconception to believe that the GmbH’s share capital is equivalent to the liability limit. Every managing director is liable with his entire private assets in cases where claims arise against the GmbH. This can only be avoided if the GmbH is converted into a KG or another form of company in which the risk can be outsourced or existing assets were transferred before the company foundation to an uninvolved third party; liability limits can, on the other hand, be set proportionally for shareholders in the shareholders’ agreement. But even in this case, the shareholders are liable with their private assets in proportion to their shares if necessary.

Accordingly, every financing bank will insist on the "leased" security and thus secure the financing - probably via land registry measures. A risk that in any case must be clarified beforehand with a tax advisor and a suitably trained lawyer.

Kind regards