Purchase Plus Improvements
November 10 2015 Posted by
Purchase Plus Improvements
Buy and renovate for the perfect abode with a mortgage for fixer uppers. Many homebuyers looking at older
properties find themselves in a common predicament: they’ve found a property that suits them, but it needs
some costly and immediate upgrades.
Many buyers add the costs of those immediate renovations into their mortgage, instead of racking up
credit card bills or selling investments to pay for the upgrades. Known as a “purchase plus improvements”
mortgage, this type of mortgage covers the sale price of the home, plus any renovations that would increase
the value of the property, with as little as 5 per cent down.
If you’re buying a home but want to add a second storey, finish a basement or redo a kitchen, it can make a lot
of sense to add those costs to your mortgage. That way you can spread your payments over the life of the
mortgage and have a cost-effective way to get your dream home. You can also use your pre-payment
privileges to pay the renovation off faster. The process is quite simple:
1) Obtain cost estimates for the upgrades
Once you have found a home, you need to get detailed written quotes from licensed contractors on the
renovations you plan, outlining the scope and all costs.
2) Get your appraisal
An appraisal with two separate values will be required: first the value of the property 'as is' and the estimated
value of the property once the improvements are completed.
3) Renovation costs are included in your mortgage
Your lender will add the estimated costs of the renovation into your mortgage. For example, with a 5% down
payment, your mortgage broker would apply for 95% of the “as improved” market value, which will be higher
than the actual purchase price. The committed amount of the mortgage will be advanced to your solicitor,
who will be instructed to hold back the renovation funds until the work has been completed and inspected.
4) Complete your upgrades; funds are released upon completion
Once an inspection from an appraiser confirms all work is complete and a copy of the building permit
(if applicable) has been received, the balance of the mortgage funds will be released to you to pay for
the renovations. There are a few options for carrying your expenditures until the funds can be released.
Some major home improvement retailers offer “no payment” options for up to six months. Larger contractors
may also be willing to finance the project short-term if they see the documentation for purchase plus
Purchase price: $400,000
Down payment: $22,000 (5% down)
Total Mortgage: $418,000 (95% of $440,000)
$378,000 will be released on closing date. $40,000 will be released upon completion of improvements
i.e. improvements are 100% complete and a final inspection has taken place.
Be sure to consult with a mortgage professional to learn about the full range of options available to you when
purchasing a fixer upper.