Mortgage Blog

Purchase + Improvements Mortgages

May 11, 2022 | Posted by: Justin Emilio

There is a little known program that you might be able to take advantage of, which could increase your chances of finding a home – especially in a market where bidding wars are the norm and you may not have the money to buy a “fixer upper”. With it, you may be able to purchase a home that otherwise may have been overlooked, due to the fact that it was in need of a little TLC. Whether it’s a new kitchen, bathroom, windows, flooring, etc. this program gives you the flexibility to purchase a home and include the cost of renovations in your purchase.
What is a Purchase Plus Improvements mortgage?

This program allows you to borrow the cost of renovations (up to a certain percentage) and add it to the home price, rolling it all into one easy-to-manage mortgage payment. Once you take possession of your new home, you can start the upgrades immediately. This type of mortgage comes with a few extra requirements before signing, such as providing quotes for the work that needs to be completed.
What does this mortgage allow?

• Best available interest rates apply
• The cost of renovations are added to the home purchase price, with mortgages available up to 95% Loan-to-Value (LTV) or refinances up to 80% LTV
• Amortization for up to 30 years, depending on the lender

How it works, and how we help you

Step 1: When you have found a property, determine what renovations need to be done and a rough idea of how much they will cost.

Step 2: Once you have an accepted offer we will get you approved based on the house price 'as-is.' At that point, you'll need to get in touch with the appropriate contractors and get firm price quotes for the work that needs to be done. Make sure the quotes specifically state the work that is to be completed, and the cost for all items.

Step 3: We will then have your mortgage approval revised to include the price of renovations, as per the quotes, and help you complete your mortgage details.

Step 4: After the sale has concluded and you take possession of your new home, you can immediately start the renovations that were agreed upon. You can use the same contractor who provided the quotes, or a different contractor if you wish. 

Step 5: Once the work has been completed, an inspector is sent out to verify that the renovations were completed properly and as required.

Step 6: You'll receive the money to pay the contractors — your lawyer will be instructed by the lender to release the money for the specified renovations.

Step 7: With the upgrades done, and all the mortgage details taken care of, you can fully enjoy your new home-sweet-home.

To give you an example of how it works, let’s say the purchase price of a home is $500,000 and you're putting 20% down. If the cost of the renovation you want to complete is $50,000 the as-improved value would be $550,000. The lender would lend you 80% of that amount ($440,000). At closing you will receive 80% of the purchase price ($400,000). The once the work is completed, you'll receive 80% of the quote price ($40,000).

Notes

• It is absolutely necessary to have firm price quotes prior to finalizing your mortgage.
• Borrowers cannot include the costs of appliances in their quote, as they are not part of the physical structure and could be taken out if you ever decided to sell.
• As you only receive funds for the renovation once the work has been completed, you'll need some liquidity to fund the renovations during the project. 
• There are maximums to how much a lender will lend on this program, typically the lower of 10% of the purchase price, or $50,000- $100,000, depending on the lender. 

With a lot of first-time buyers trying to find creative ways to get into this increasingly expensive market, the Purchase + Improvements program gives you the ability to look at homes that need a little TLC. We’ve had several clients manage to build up tens of thousands of dollars in equity, by using this program instead of buying a home that has already been renovated. Why pay more for a house that someone else has renovated into their dream home, when you can include the renovation costs in your mortgage loan and renovate to make it yours?

For more information, reach out anytime!

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