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Once again this month, our go-to mortgage broker Mortgage Jake is bringing us the financial scoop. Today, he’s telling us all about Purchase Plus Improvements programs.
If you’ve been scrolling through Pinterest or Instagram pining for those amazing-looking homes, or are obsessed with HGTV, you’ve probably succumbed to the belief that renovations are:
- Cheaper than they are;
- Simpler than they are; and
- You always get what you want.
- They aren’t.
- They aren’t.
- You won’t.
But I’ve got good news. If you’ve fallen in love with a house but hate the kitchen, we may very well be able to finance your hopes and dreams…and turn that amazing-house-with-crappy-kitchen into an amazing house.
How so? By adding the cost of the renovation to the mortgage! It’s called Purchase Plus Improvements.
Purchase Plus Improvements programs are widely available with many lenders, including CMHC, Genworth and Canada Guarantee. While each program has different rules and procedures, they essentially work in the same way.
How Does Purchase Plus Improvements Work?
- Get pre-approved for a mortgage so you know your maximum approval amount.
- You find a house you love, but it’s missing that one ingredient. Or, a few ingredients. These can be cosmetic improvements or unsexy renovations. Either way, you send the listing to your mortgage broker, discuss the upgrades you want to make and then get two contractor quotes (in writing) to find out how much your dream renos will cost. Note: the purchase price + the renovation cost can’t be more than the maximum mortgage you were approved for.
- Make the offer and send the accepted offer and contractor quotes to your mortgage broker so they can get to work finding you a mortgage that includes the renovation costs.
- Your broker then submits the quotes for improvement and the lender assesses (with an appraisal) that the work you intend to do will indeed increase the value of the property. Remember: they are effectively LENDING you the funds for the improvements, so they need to be on board with the renos you want to make.
- Once you take possession of the home, you can start the renovations. The funds for the renovation part of the mortgage are held by your lawyer until the lender confirms that the work has been done You do the work, finish the project and notify your mortgage broker, who will send in an appraiser.
- The lender receives the appraisal, and assuming they are happy with the work completed, they instruct your lawyer to release the money to you to pay the contractor.
Sounds simple, right?
Not really. Here’s the caveat to Purchase Plus Improvements:
- You need to have about 30-40% of the renovation budget available to you BEFORE you borrow it. Why? Because lenders don’t lend when project milestones are complete (eg: we finished the framing, can we get some money? – NO!). They give you the money once you have done everything you said you would do as per your original quote.
- Why 30-40%? Because it’s almost impossible to find a contractor who will work and not get paid anything until the job is done…and nobody in their right mind should ever pay a renovator/contractor 100% up front!
Pro Tip: you don’t have to work with the contractor(s) who gave you the quotes – you can work with anyone you want (at an arms-length relationship).
Here’s who ends up happy with Purchase Plus Improvements:
- Your contractor is happy because for SURE if they follow the gameplan, they will get paid.
- You’re happy because you can keep your contractor accountable and you will have that new kitchen/bathroom/floors/windows etc, in your new house.
- Your lender is happy because their security has improved value so they’re more than happy to lend you that extra money!
There are LOTS of other minor variations to Purchase Plus Improvements programs that simply can’t be covered in a blog. Talk to your mortgage broker and don’t make any assumptions.
But the good news is: If you’re an HGTV, Pinterest or Instagram dreamer, there are options to turn that not-so-perfect house into the perfect house for you.