Homeowners who are planning on building (or remodeling) a home.. TAKE NOTE!
Homeowners who are planning on building (or remodeling) a home — take note. You definitely want to close on and record your construction mortgage BEFORE you commence ANY construction activity on the property. The same rules apply for any renovation or expansion on existing homes when there is to be financing put into place. Failure to record the mortgage before beginning any construction activity is commonly known as broken priority. The penalties are severe. The key concepts involved are “commencement” and “priority.” Under the mechanic’s and materialmen’s statute* of New Mexico, “commencement” of (ANY) activity on a property establishes the lien priority date for any lien filed by a contractor that does not get paid. That is, commencement of activity by ANYONE establishes that specific date for priority of collection for ANY lien filed on the subject property, WHENEVER that lien is actually filed. Remember, a mechanic or materialman can file their lien at the County Courthouse as late (in some cases) as 120 days after the work on the structure is completed. But the lien has priority as of the project commencement date. When a lender loans money for construction they will require a title policy. That policy assures the lender that their mortgage document is valid and enforceable against the property, in a certain priority position. The lender will not loan unless they are issued the title policy, with insurance coverage that the lender is in a certain priority position. If construction has commenced on the property, or materials provided, the lender cannot get priority. The lender is “trumped” by every contractor, since the lien priority for contractors and suppliers has been set. When the contractor files its lien later, the lien will “date-back” to the commencement. Title underwriters are very reluctant to issue a title policy with broken priority. Which means you may not be able to get your loan. If the underwriters are willing to insure, the requirements for the title insurer to satisfy themselves as to the risk are huge, including financial records, indemnity agreements, control over disbursements and funds, and others. Further, the State DOI regulations require an extra, additional broken-priority premium of $5.00 per thousand dollars of loan amount. Surveyors and the work of architects do not constitute “commencement”, although those parties still have lien rights. Thinking about some construction or renovation work? Think twice, and make sure your mortgage is closed and recorded PRIOR to commencing any activity on the property. *The author is NOT an attorney and this statement is NOT an opinion of counsel. This article does NOT constitute legal advice.