Shelley from Dominion Lending Centres Hilltop Financial came through with our financing just the way we wanted it. We will explain a little bit about this one since we are not doing a traditional mortgage.
Our mortgage is a ‘purchase plus improvements’ product which means that we can purchase a property with a predetermined renovation plan/budget and finance the entire amount…purchase price + renovation budget = mortgage total. Now, there are some added hoops that come with this kind of mortgage and every lender is a little different. We will outline our arrangement and some typical requirements for this type of mortgage.
THE QUICK OVERVIEW
- max amount = purchase price + 10% for improvements
- improvements money is added to the total value of the mortgage
- downpayment is based on the total mortgage (purchase + improvement $ = total mortgage)
- improvements money is released once the reno is complete (this is important to know and understand)
- receipts for improvements need to be provided (some lenders allow for more lenient receipt proof than others)
Without putting myself in a pickle by speaking for all lenders I am going to put out this disclaimer and say that this information is based on our own experience and knowledge of the ‘typical’ for lenders in Canada. This information many not apply to all improvements mortgages…talk to your mortgage broker (or ours!) or bank about their specifics.
1) Renovation Plan & Budget
In order to apply for this type of mortgage you have to have a renovation plan (i.e. Kitchen/Bath replacement, new appliances, new roof, new floors) and you have to have it planned with some (not all) detail. By this I mean you can’t just go to the lender and say I want to buy new appliances and they will cost $20,000 so give me an extra 20K and I will spend it. No no, you must be armed and ready with a plan, a budget from a designer (like Sitka Studios), contractor, retailer or someone/somewhere ‘official’ and the lender must approve the renovations ahead of time.
With your mortgage application you will submit your renovation plan and budget for approval…then you wait.
2) Lender Review & Appraisal
The lender will determine, with the assistance of an appraiser or appraisal system (online), the value of your home purchase, potential value if renovated (based on your plan), and determine if your renovations are likely to improve the value of the property. This is their risk assessment and you don’t have much control over their decision. That being said, if you submit a well laid out plan and request for high value return on investment renovations you are likely to see a favourable response from the lender. (see disclaimer)
If the lender agrees to the improvements the money will be advanced to your lawyer at the time of completion on your home. This is an important note…the money does not go directly into your pockets up front. Your lawyer will hold onto the money (in their trust account) until the renovations are complete.
3) Renovation Completion
When the renovations are complete you notify your lender, they will send out an appraiser to confirm the work is done and the property value has in fact increased and then (and only then) will the improvements money be released from the lawyer’s trust account.
Why would I do this kind of mortgage?
For us the answer is simple. We don’t want someone else’s renovations, we want Sitka renovations but we don’t want to completely deplete our savings account to finish the renovations. Buying real estate is pricey (especially in Greater Vancouver) so this product allows us to have our cake and eat it to.
A benefit of a Purchase plus Improvements mortgage
Build up equity by using this type of program instead of buying a home that has already been renovated. Why pay more for a house that someone else has renovated into their dream home, when you can include the renovation costs in your mortgage loan and renovate to make it yours?
What will the lender approve and not approve?
That depends on the lender, the house, and the real estate market. Typically (see disclaimer) if you are looking at high value return on investment items (i.e. kitchens, windows…) you are likely going to get approved. But if you are replacing items that do not need replacing (ie. the house has stone countertops that are in excellent condition but you hate the colour so you want to replace them) you might not get such a favourable response form the lender. Why you ask? Well they are looking for improvements that actually improve or increase the value of the home since they will be increasing their ‘risk’ by lending you extra money. They want to know the value of the house will go up with the improvement, which leads me to my next hoops with this type of mortgage.
Do I have to have everything picked (tile colours and specific colours) and what if I change my mind about specifics after the mortgage is approved? Can I change things about my renovation after I have approval from the lender?
Yes you can change your mind but if it is a major change you may have to let your lender know in advance. For instance, when putting together your application for the mortgage you outlined that the kitchen was going to be replaced with custom cabinets, mid grade appliances, and granite counters but now that you are starting the detailed planning of the kitchen you realize that you want quartz counters. You probably don’t need to tell the lender this as the end result is a similar product with a similar return on investment value. (again see disclaimer)
This might not seem like a big deal, I mean, who can’t get home insurance right?!? Well, unfortunately when buying a fixer upper, especially old fixer uppers, there are some building materials and systems that might prevent insurance coverage right away. For instance, knob and tube wiring is a favourite item for the insurance companies. If you have it you MUST replace it and not only because the insurance companies won’t insure you, it is also not safe to have in your home. This is just one example of many that might come up when buying a home of any age.
We confirmed we can insure the home so we are good to go to step 2…sell the townhouse!