This article is how to include the cost of a home renovation into your Mortgage. FAQ below.
This is a high-level list of how this program works. Afterward, let’s go through some frequently asked questions.
Purchase Plus Improvement Mortgage:
- As-is purchase price. You will create the “as-is” purchase price of the home. This is what you agree to pay with the seller.
- As-complete (improved) purchase price. You will create the as-complete value of the home. For the planned renovation work you wish to complete, you will need quotes from a general contractor. The as-is purchase price PLUS the quotes for the renovations EQUAL the as-complete value.
As-improved Value = As-is purchase price + Renovation quotes.
NOTE: Your Mortgage qualifying is based on the as-improved purchase price (affordability and minimum down payment requirements). - Rules of thumb. The renovation cost limits are 10% of the purchase price UP TO $40,000. Including renovations into your Mortgage below these rule-of-thumb numbers is OK. Renovations above these rule-of-thumb measures are OK, but not every dollar will be eligible to be included in your Mortgage. There are exceptions to this rule.
- Quotes. During the condition of finance window of time, the Mortgage lender will want to see quotes for the renovation work you desire. These quotes are to be professional in nature (company letterhead); not on a napkin. The contractor who provides the quotes does NOT have to be the contractor who completes the renovation work.
- Eligible renovations. Think value improvement. If the renovation work you want to complete would compel you to pay more for the home, if the renovations were already complete, this is the general direction/intention of this program. This is NOT a construction draw Mortgage program. Think improvements like, flooring, kitchen renovation, building a garage, replacing a roof, bathroom renovations, basement completion. Things that if they were already completed, you would be reasonably be willing to pay more for the home.
- Money flow. On the day you take possession of your new home, the Mortgage to fund your as-is purchase price is released. The renovation money is held back in a trust account with your Real Estate lawyer. You pay for the renovations up front (cash, credit, borrowed money, or your contractor pays for everything). Once the renovations are complete, the money held back in trust is released to you. With this money you can pay off debts, replenish savings or pay back your contractor etc (or any combination).
Frequently Asked Questions:
Can I do the renovation work myself?
Yes, if there is a reasonable case to be made you have the skill, tools and experience to complete the project. Yes, this can work. If you’re a flooring installer, and the renovation you plan is to re-do the homes’ flooring – this is a match. If you’re a financial advisor, and want to re-do the homes’ flooring, it’s likely the lender will want a professional to complete the project.
How long do I have to complete the renovations?
90-120 days (3-4 months). If an extension is requested, for reasonable reasons, having this granted is usually acceptable. Understand, your Mortgage payments are made on the ENTIRE loan amount. So you are paying interest on the money held back in trust, plus any borrowed money on the cost of the completing the renovations. There is incentive for the project to be completed sooner than later.
Do I have to save all of my receipts?
Yes, save the receipts and track the cost of the renovations. Depending on the dollar amount of the renovations, and the Mortgage lender, some lenders will want to see all receipts or paid invoices as a part of their policy to release held-back money. There are lenders who require a visit from a paid inspector to confirm renovations are completed (and up to acceptable quality) before held-back money is released. So, yes, save receipts. They may or may not be required though.
What if I go over budget? Under budget?
Over budget is simple. There is no additional money to be included in your Mortgage. Your Mortgage is funded and complete. We done.
Under renovation budget depends on the lender and amount we are dealing with. Without being too specific, plan for any under budget money to be added as a lump sum payment onto your Mortgage balance. For example, say we planned for a $10,000 renovation and the project came under budget at $8,000. Plan for the lender to direct the lawyer to release the $8,000 to you and make a $2,000 lump sum pre-payment. Mortgage lenders are NOT in the business of releasing cash to clients. Why? There is no telling where that cash might be spent.
Can I include …??
The most common question I field is about including the cost of appliances into the cost of the Purchase Plus Improvement program. Things like a fridge, stove, blinds etc. Yes, we can include these things BUT I don’t think planning them on their own is acceptable. If you’re doing a kitchen renovation, we can make the case the fridge/stove etc is a reasonable part of completing this project. New appliances, as part of a kitchen renovation, improve the value of the home.
Mortgage lenders tend to assume the worst in people. If a fridge is included in the Mortgage, some lenders will think people will turn around and sell the fridge for cash. Has this happened in the past, sure. If the fridge is a part of a bigger renovation plan, we should be able to include the cost. Your contractor will be helpful in this with “other expenses” invoice items.
Do I have to work with the contractor who quoted me?
No.
What is the minimum down payment?
The minimum down payment is 5% of the as-improved purchase price – for values less than $500,000.
For as-improved values above $500,000 the minimum down payment is 5% of the first $500,000 plus 10% of the remaining balance of the home.
I have more than 20% down payment, can this program still work for me?
Yes. Know this …
This program was originally intended for buyers with less than 20% down payment. This is an insured Mortgage program. Mortgage default insurance companies offer insured Mortgages to these clients. Default insurance companies like when buyers improve their asset. This helps with re-sale should the borrower default on the loan.
Yes, you can put 20% down payment on the Mortgage application and request to include renovations into your Mortgage. The Mortgage insurance premium on 20% down payment is 2.4%. Some think this defeats the purpose of including the cost of renovations into the Mortgage. It might be better to hold back some down payment money and pay for the renovations with cash?
I am a “new to Canada” home buyer, is this program available to me?
Yes. Regular Mortgage qualifying apply to this applicant and this program.
I’m buying a second home – is this program available?
Yes. Purchasing a second home, with less than 20% down payment is possible. A second home is not to be rented, or is designated for a immediate family member to live-in the home. Without getting into the nitty gritty of purchasing a second home – the answer is yes, a second home Mortgage is eligible for the Purchase Plus Improvement Mortgage.
I’m buying a rental property, is this program available?
Yes. Buying a rental property requires a minimum down payment of 20%.
Have a question, leave a comment below.
I hope this is helpful for you! Be sure to contact me directly to help plan your Purchase Plus Improvement Mortgage.
403-809-5447 OR chad@canadamortgagedirect.com
Cheers,
Chad Moore
