Let’s start with a little story. I have met with my clients and pre-qualified them for a mortgage. They have saved their down payment and they have their closing costs plus a little extra for any surprises. I send them on their way to look for a home. The clients meet with their agent and spend the next week looking at various homes. They finally find the one that is almost perfect for them but the kitchen is somewhat dated and needs some upgrading. My clients love to cook so this is a possible deal breaker, but my clients love everything else about this home. They do not have the cash for the renovations themselves so what are their options?
Simple – we get them a purchase plus improvement mortgage.
This is a great product as a client can purchase a home and get some extras for upgrades to the home. We must note that the money has to be used for renovations and not new appliances, snow blowers etc. The upgrades could be siding, roof, windows etc.
The procedure is simple. We get a purchase and sale along with a quote for the work to be completed. As a broker I submit these documents to the lender up front so they know exactly what is requested.
Lets use an example. Client is looking to purchase a home and all have agreed on a $200,000 price. Using the above short story the kitchen needs to be brought up to date and the renovation quote to do this is $15,000. We submit the deal to the lender at $215,000 less a 5% down payment. This will mean a mortgage amount of $204,250 plus CMHC fee. The fee for CMHC based on a 25 year amortization equates to 2.75% or $5616.87. This means my client will be signing for a mortgage of $209,866.87.
As you can see you are actually able to finance 95% of the improvement costs and get what you want. The lawyer will hold the funds in trust until the work is completed.
Normally the renovation costs are capped at 10% of the purchase price but each lender have their own criteria so it’s best to talk to someone who knows the lenders policies before making the final offer. (Do not prejudge anything as some lenders will allow a lot higher than 10%)
The work can be completed once you take possession of the home but again each lender has certain criteria on when the work has to be completed. The norm in the industry is 90 days. Once the work is complete you may be required to have a professional inspect the work and issue a report stating all work completed and then the lawyer will pay the company/person who did the work.
The same procedure applies when you are refinancing a property. The difference is the determination of value. Under the guidelines that we presently adhere to you are allowed to refinance to a maximum of 85% of your property value.
If your home is currently worth $200,000 and you are looking to do a refinance then we can look at a deal up to $170,000. Now lets say you owe $100,000 on your current mortgage then you have $70,000 to use for renovations, debt consolidation etc. Based on this you would probably not need the improvements program. Now if your current mortgage balance is $160,000 there is not a lot of money left to do any type of major renovation. So if we use $15,000 again as a renovation cost to complete and upgrade the kitchen and for arguments sake state this will improve the homes value to $215,000 then we can do the deal. Based on the as improved value of $215,000 and going to 85% of this value we have a net mortgage of $182, 750 for disbursement (again CMHC fees will be added but at 85% loan to value the % on 25 year amortization is 1.75% or we can do a top on the new amount being financed – again talk to a professional to discuss the options).
As with a purchase the renovations can be completed after the deal closes but again must be done within a certain time period. Also you are probably going to be required to have an appraisal completed showing the “as is” value and the “upon improved” value.
Remember you should talk with a professional to go through all the options you have available. I offer free consultations and no fees on residential mortgages.
As always comments are appreciated and encouraged.
Eric Gall is the owner of Avanti Mortgages (operating as a mortgage specialist for TMG Atlantic). If you are purchasing, refinancing or renewing your mortgage contact Eric or check out his website and apply online.