You find the perfect neighbourhood you want to live in and everything you need is close by, but you just can’t find the perfect home for you and your family. One has an awful looking bathroom, another has an outdated kitchen, and a third home has no garage. Enter the Purchase-Plus-Improvements mortgage product. This type of mortgage allows you to not only get a mortgage to purchase the home, but also to include any upgrades you want to make in order to turn a “so-so” house into an ideal home by including the costs right into the new mortgage. Below are 7 “must knows” about the process of financing a fixer-upper.
1. The “adjusted” purchase price that goes on the mortgage approval is determined by adding the purchase price from the offer to purchase document plus the cost of the renovations you would like to complete. The downpayment amount is calculated on the “adjusted” purchase price. If you are putting down less than 20% of the purchase price and require high ratio mortgage insurance, that cost is also calculated on the “adjusted” purchase price.
2. The actual cost of the renovations is determined by providing cost quotes from a reputable contractor at the same time you submit your purchase contract to your mortgage professional. If you plan on completing all or some of the improvements yourself, you will not be reimbursed for the cost of your labor, only the material costs. Do talk to your mortgage professional about the specifics if you do want to do some of the work yourself as the rules and guidelines vary with the many different lenders.
3. The most important feature about this product is the renovations you want to finance must increase the value of the home to an equal or higher value in order to qualify under this type of financing. Price increasing renovations may include improvements in the bathroom(s) or kitchen, adding a garage, finishing the basement or upgrading the electrical amperage or adding in a new cost efficient furnace. If you’re unsure whether an improvement would qualify or not, don’t hesitate to consult with your mortgage professional.
4. The buying and closing process for this type of product differs a bit from a regular mortgage. In this case, you do not get the money for the renovations upfront as the renovation amount is held-back at the lawyer’s office at time of possession until you can confirm the improvements have been completed in a professional manner. Once you’ve advised the lender the upgrades have been completed according to the original quotes via contractor invoices or an inspection by an appraisal depending on the lender, your lawyer will then release the remaining funds to you to pay the contractor bill. Do be aware you are paying interest on these held back funds at the mortgage contract interest rate while they are being “held” in your lawyers trust account so it does make sense to get these upgrades completed as soon as possible.
5. Given you will not receive the funds to pay for the work to be done until after it has been completed, be prepared to negotiate the terms of payment for the work to be done with the individual or company completing your renovations. Be prepared to provide an initial deposit upfront to start and full payment upon completion of the work as per the mortgage approval you will have received from your lender.
6. Your mortgage lender will have a restriction on how many days you can take to complete the renovations to the property. Deadlines differ between the various mortgage lenders and they can range from 30-days all the way up to 9 months after you have moved into the new home depending on the renovation details. For instance, if you buy a home in the middle of winter, you will not be able to have a garage built until the weather improves. And again, in addition to paying interest on those renovation funds, it is important to note you will be making mortgage payments based on the “total” mortgage amount, including the renovations funds from the time you take possession of the home. As you are paying interest on money you haven’t received yet, you can see why it’s important to work with contractors who are able to complete the improvements as soon as possible.
7. The documents required at the time of purchase are the cost quotes for the renovations, or the material costs if you’re completing the improvements yourself. Once the renovations are completed, you will be asked for an inspection by a certified appraiser to confirm the improvements have been completed and are of professional quality. The cost of this inspection could be about $75 – $100. Alternatively, your lender may just require receipts for the renovations before they approve the release of the held-back funds. Be sure you are clear on what your mortgage lender wants in order to prove the improvements are complete as they differ between lenders.
If you want to buy and renovate a property, the Purchase-Plus-Improvement product is just one way you could go about it. Alternatively, you could pay for the renovations yourself or finance them by utilizing your line of credit, credit cards, or a bank loan. The appeal of this specific product is you can finance costly renovations at low interest rates with minimal change to your mortgage payments. Talk to your mortgage professional to see if this product is right for you.