Creating your dream home
Having troubles finding your dream home? Are the houses in your price range looking a little dated? If you find a home in your preferred neighbourhood that has the features you want, but needs a little updating, you may want to think about a Purchase Plus Improvements mortgage.
This option is designed for people who wish to purchase a home that may require some immediate upgrades:
- updated electrical service
- sewer hookup
- a new roof
- central air
- a new furnace
- new siding
- eaves
- soffits
- fascia
- doors
- windows
- a new kitchen
- carpeting
- or any other renovation that would increase the value of the home.
It is important to know that this program covers permanent updates to the home, but cannot be used for moveable assets such as appliances. This can be a great solution if you find a house you love but realize that it will take some time to save for any renovations that you want to do.
Here’s how it works. Let’s assume that you have a five per cent down payment. Before the mortgage financing is finalized, you will collect written quotes for the repairs or improvements to be done.
When the application for financing is submitted, the request is made for 95 per cent of the purchase price plus 95 per cent of the cost to complete the improvements.
It is important to know that the lender will hold-back the improvement portion of the mortgage until the work has been completed and inspected, normally within 30-60 days of closing.
Once the work has been completed, the lender will advance the balance of the funds and the contractor can be paid.
This means that you will need to find a way to cover the cost of the renovations temporarily, or work with a contractor who is willing to be paid at the end of the project. Some clients use a credit line to cover the costs until the mortgage funds are released.
What does this mean? Let me give you an example, with the client putting five per cent down:
Purchase price: $400,000 X 95% = $380,000
Cost of improvements: $40,000 X 95% = $38,000
Total mortgage: $440,000 X 95% = $418,000
An application is made for a mortgage in the amount of $418,000, which represents 95 per cent of the purchase price plus 95 per cent of the improvements.
On the closing date, the mortgage advanced to complete the purchase is $380,000 plus the original five per cent from the purchaser’s down payment ($20,000), which provides sufficient funds to complete the purchase of $400,000.
The seller is paid in full and the house is transferred in to the name of the purchaser.
After closing, the contractor completes the improvements (normally within 30-60 days after the closing) and the lender advances the hold-back of $38,000.The purchaser pays the additional five per cent of the cost of the improvements ($2,000) and the $40,000 owed to the contractor can be paid.
Last summer, I worked with clients who bought a rural property. When the septic inspection was done, they were told that the system was on its last legs.They made the decision to use a Purchase Plus Improvements mortgage and replaced the system before they ran into difficulties.
I’ve also work with clients who used the program for cosmetic upgrades.They renovated their kitchen and bathrooms and changed out all of the flooring.They essentially moved in to a brand new home in the area they wanted to live.
The appraisal at the end of their project showed an increase in value of almost $75,000 based on $35,000 worth of improvements they had done.
With this program, purchasers are happy because they have done extensive improvements to their homes with a minimal cash outlay (the balance was financed with their mortgage).
In both cases they get to enjoy an updated home without scrimping and saving to come up with the funds for improvements.
