Purchase Plus Improvements

Have you been house hunting and found the perfect house, but oh dear… the kitchen is a time warp to the ‘80s? There may be a way to buy that house and make it exactly how you want it. This is through a Purchase Plus Improvements mortgage, here is how it works:

For insured mortgages (less than 20% down) you can include a renovation budget of 10% of the value of the home to a maximum of $40,000. For all other mortgages, you can include a renovation budget of 20% of the value of the home to a maximum of $60,000 and there may exceptions for further funding.

The improvements need to be exactly that, improvements to the value of the home. Lenders typically don’t allow roof replacement and other maintenance items to be included, instead improvements are normally basement finishings, garage installations, kitchen/bathroom/bedroom overhauls and other “upgrades”.

On a purchase plus improvements mortgage, you’ll want to have a trusted contractor lined up and ready to get into the home and quote the work as soon as you get an accepted offer, this timing is very important. You’ll need to have a discussion with that contractor about the fact that you’re looking at a purchase plus improvements funded renovation. The reason for this is that not all contractors will allow you to initiate the work with a minimal deposit. That’s important because any deposits required to get underway will be the buyer’s expense until the work is complete and the lawyer releases the additional funds. You can perform the renovations on your own but will still need it to be quoted by a third party contractor. And if being done on your own, you need to meticulously keep all receipts for materials.

Once we have the quote in hand, we can submit the mortgage application – hence the reason that time is of the essence.

Assuming all is approved and you take possession of your new home, the work will need to begin right away. Most lenders require that the work be completed in no more than 90 days, although extensions are allowed. Once the work is complete, we order a specific type of appraisal called a progress inspection. That appraiser will have the purchase contract and the renovations quote in hand and will inspect the work to verify that it is 100% complete. At that point, the lender will instruct the lawyer to release the amount of funding that was held back for the improvements.

Lets have a look at some prospective numbers:

• Purchase price of the home: $400,000

• Improvements budget: $40,000

• The total value of the home presented to the lender: $440,000

• Downpayment calculation is made based on then total value of the home: $440,000 – 5% downpayment would be $22,000

• On possession day, the lender releases all mortgage funds except the additional $40,000

• The work begins requiring a deposit to the contractor paid by the buyers

• When the work is 100% completed a progress inspection is ordered

• The appraiser sends the report to the lender who then releases the $40,000

• The lawyer pays the deposit amount to the buyer and the remainder to the contractor

So, the main pieces of information to pull from this is that staying on budget is very important, we cannot alter the improvements lending budget. And whatever initial deposit is required by the contractor must be paid by the buyer which will then be re-reimbursed once the lawyer releases the funding of the renovations. That is why it’s so important to secure a contractor who understands purchase plus improvements mortgages. It’s not uncommon to see contractors require 50% deposits. You’ll want to select a reputable contractor who will do the work on a minimal deposit understanding that full payment will come once the work is complete.

If you find a house that is perfect for you but there is one thing that is stopping you, I highly recommend a purchase plus improvements mortgage.