Purchase Plus Improvements
Many home buyers find their dream property, but it needs costly and immediate upgrades. Instead of racking up credit cards or selling off investments, consider a mortgage designed to allow you to add the cost of those immediate renovations into your home.
What is a purchase plus improvements mortgage?
This flexible mortgage product enables you not only to buy a home that is more affordable due to required upgrading but also allows you to customize your renovations. With as little as 5% down, you can buy a home, renovate it and pay for it all in one mortgage payment.
If you're buying a home but want to finish a basement or redo a kitchen/bathroom, redo the roof, new windows, etc it can make a lot of sense to add those costs to your mortgage instead of carrying the cost on credit cards and lines of credit.
How does the process work?
Once you have found a home, you need to obtain quotes from contractors on the renovations you plan, outlining the scope and all costs. These are provided to the mortgage lender. Depending on the extent of the work required and the costs, an appraisal may be necessary to ensure the improvements increase the home's value.
The mortgage lender will add the estimated cost of the renovations to your mortgage. Remember that your down payment will be based on the total cost, so if you put 5% down, that will be 5% of the purchase plus renovations. At closing, the lawyer will release the funds to purchase the home, but the renovation funds are held in trust with the lawyer until the work has been completed.
Once an inspection from an appraiser confirms all work is complete, the balance of the mortgage funds will be released to you. There are a few options for carrying your expenditures until the funds can be released.
Only certain renovations apply
We have had this come up several times but unfortunately, that long-awaited hot tub will not be able to be included as part of the purchase plus improvements mortgage. Remember that any removable item, such as a kitchen appliance, washer/dryer, etc cannot be added in.
The intended renovation must increase the value of the renovation funds being borrowed. For example, if you purchase a home for $500,000 and provide $25,000 in contractor quotes, the as-completed value must be $525,000. An appraisal may be requested to confirm this.
Important Notes
It is critical to have firm quotes before finalizing your mortgage.
All of the work must be completed and reviewed by the mortgage lender before any funds are released.
Some lenders require the renovations to be completed within a specific time frame. It is important to note if the renovations take longer than three months, as this will help determine which lender we use.
Typically the maximum amount you can borrow for improvements is 10% of the purchase price OR $40,000, whichever is less. If the renovation makes sense, we may get an exception for increasing the amount.
The funds advanced MUST be used toward the work in the initial quotes. By changing the scope of the work after the fact, you run the risk of the mortgage lender not releasing funds and having them put back onto the mortgage
The purchase plus improvements mortgage is one of the best untapped opportunities when buying a home. Few homes listed for sale are perfect; most need something to make them ideal to meet every box on your checklist.