I have received a few calls from my mortgage clients who are out there looking for their ideal home. They have found a home that will require renovations to bring it up to the standard they want. They want to know what their options are?
There is an insured mortgage option called “Purchase Plus Improvements”.
This is how it works, in part :
For example, if you purchase a home for $320,000 and want to do $30,000 worth of renovations, CMHC will insure a mortgage based on 95% of the “as improved” value. In other words, with a down payment of 5% CMHC will insure a mortgage of $332,500.00. ($320,000 purchase price+$30,000 renovations x95%)
The key for this to work is that the cost of the renovations has to be reflected in the “as improved” value of the house. In this example, the Insurer would have to agree that the house would have a value of at least $350,000 after the $30,000 worth of renovations is completed.
The insured loan will be based on the lower of either the purchase price plus the actual cost of improvements or the “as improved” market value.
When you have decided to make an offer on a home, make sure that offer has a “subject to financing” condition. We need to make sure a CMHC “Purchase Plus Improvements” mortgage will be approved. Ensure you have longer than normal subject removal, because there are additional steps required in this process. Since the offer will be conditional on arranging this type of financing you are not at risk in the event that CMHC feels that the cost of the proposed renovations are not fully reflected in the “as improved” value.
Next, have a qualified contractor put together a written description and a cost estimate for the proposed renovations.
The following information needs to be prepared by the contractor to be submitted along with your mortgage application to the lender:
1. Descriptions of the work
2. Types of materials being installed with applicable quantities (ie. 250 sq ft wood flooring)
3. Total Cost of all work (including applicable taxes)
Bring the written contractor’s estimate along with the “Offer to Purchase” to me.
Once the mortgage plus improvements has been approved by the lender and the insurer, you can remove your subjects on the offer to purchase.
When do you get the renovation funds?
When planning this type of purchase you will need to find other options to fund the renovations, until they are completed. On the date of closing (you now own the home) the lender only releases the funds for the purchase of the home and not the additional money you need to do the renovations.
When the upgrades are completed, and inspected, the funds are released to you.
If you have more than 20% to put down (conventional mortgage) you might want to consider putting less down (getting a larger mortgage or an insured mortgage) then use the extra funds from your own resources to pay for the renovations.
We could also look at whether there is sufficient equity for you to qualify for a Home Equity Line of Credit, which you would then use to pay for the home renovations.
This is a brief overview of a purchase plus improvement mortgage. If you are considering buying a home that needs renovations, contact me 604-726-9550. I will guide you through the process to help you determine which option is going to work best for you.
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