You come across a house and it’s love at first sight. Everything is perfect, the location is good, the yard is big, there is just the right amount of bedrooms BUT there is one small issue. The kitchen needs to be updated, the floors are scratched because of the current owner’s dogs and the bathroom is old…You also know that once you put a down payment there won’t be much left over for renovations…
There just might be a solution for you. It is possible to purchase a home and undertake renovations!
Home Purchase plus improvements: how does it work?
Let’s say you want a $300,000 house and you have $22,000 in cash for the down payment. You estimate that the cost to renovate your kitchen to your liking would be $25,000…
Great news! You have enough money for the down payment and for the renovation loan! The biggest advantage of the renovation loan is that it is added to your mortgage under the same terms as the mortgage, same great rate, same amortization and a single monthly payment.
Example of a home purchase plus renovations
I previously mentioned buying a house for $300,000 and putting $25,000 in renovations. Let’s take that example to clearly explain how a purchase plus improvements work.
When applying for financing, you must tell your mortgage broker that you would like to renovate the house. You will then need to provide a detailed estimate of the project costs. The estimate can be made by a contractor or by you, should you decide to renovate yourself. In this case, you can go to the hardware store and estimate the cost of materials. The financing will therefore be on a total amount of $325,000.
$300,000 cost to purchase the home + $25,000 in renovations
You will need 5% of this amount ($16,250) plus your 1.5% security fund ($4,875) that will remain in your account, but that you must show that you have.
On the day of the deed of sale, $300,000 will go to the buyer for the sale of his house and $25,000 will be kept in a trust account.
You must do the renovations that you said you would. Once these are completed, an appraiser will approve that the renovations are as expected and you will receive the $25,000 needed to pay your contractor or the renovations.
Financing renovations at the time of purchase: what you need to know
- You can borrow up to 20% of the home’s value for renovations
- The loan for renovations cannot exceed $40,000
- You will need to provide a proposal of the renovation costs
- The renovations must be pre-approved by the bank
- Not all renovations will be accepted
- You will need to renovate prior to receiving the money. Once the renovations are completed an appraiser will validate that these have been done. In some cases, you will need to pay the appraiser, approximately $150 to $200
Which institutions offer the financing for purchase plus improvements?
The vast majority of financial institutions offer this type of financing. However, it is important to mention that there are some differences between the financial institutions when it comes to purchase plus improvements. Some will lend a maximum of 10% of the home’s value while others may go as high as 20%. In some cases, it is even possible to get more. In addition, sometimes there is a maximum limit of time to carry out the renovations. It is therefore important to be well informed before undertaking such a project. My role is to direct you to a financial institution that best suits your needs. As much in terms of the interest rate, which we want as low as possible, and the inner workings of the purchase plus improvements.
Which renovations are most likely to be accepted?
As mentioned in the list of criteria above, not all renovations will be accepted. For a renovation to be accepted it must increase the properties value. In other words, if you would like to tear down a kitchen that was already in great condition to rebuild one of the same quality but with a different cupboard layout, it is possible that you will not be accepted.
Here are a few renovations that will likely increase your property’s value:
- finish the basement
- renovate an outdated bathroom
- update the kitchen
- redo old flooring
- install a heat pump
You can call or leave a comment to discuss your project with me. As a mortgage broker, I am very familiar with the types of renovations that can be accepted and those that run the risk of being refused. However, in the end, decisions are made on a case-by-case basis.
The Purchase for improvements loan is an interesting program that allows homebuyers to update their homes to their liking without having to save up and at a better interest rate than if they had opted for a personal loan to renovate.
Please let us know what you would like to renovate in the comments below!