PURCHASE PLUS IMPROVEMENTS EXPLAINED

General Konstantin Seroshtan 30 Nov

The purchase plus improvements mortgage is one of the best untapped opportunities when buying a home. Many homes for sale in the market are in great locations and the structure or ‘bones’ of the property is also excellent. But the property may not be totally up to date as far as to look or feel goes, or there may be a problem with the property that needs repair, or you might just have a different idea as far as how the interior could look.

Either way, if the home needs a bit of updating or renovations, this is where a purchase plus improvements mortgage could really help out.

This article will show you, not just how the purchase plus improvements mortgage works, but will also provide the best tips and strategies to get the most value out of the program, without any additional stress or cost on your part.

Specifically, this article will discuss:

  • How the purchase plus improvements program works in 7 steps
  • How to get the most out of a purchase plus improvement mortgage.
  • How to avoid issues, or potential loss from a purchase plus improvement mortgage

How the purchase plus improvements mortgage works in 7 steps:

  1. You can get a mortgage approved with as little as 5% down payment, and include some home improvement costs into the mortgage amount.
  2. When applying for purchase plus improvements mortgage, the contractor’s quote, for the work to be completed, should be provided up front with the offer to purchase the home. In other words, before you complete the purchase offer, we need to have a contractor quote outlining the work to be done, and what the cost will be.
  3. The contractor’s quote does not mean we need to specify exactly what materials will be used, but just more generally what will be improved along with the cost.
  4. There are some lenders I work with that will allow the homeowner to do the work themselves, but we will still need the costs to be outlined.
  5. After the purchase is completed, the borrower will need to come up with the funds to complete the improvements. Funds could come from a line of credit, gifted money, store ((ex. Home depot) credit or credit on their contractor themselves. The bottom line is that you need to figure out how to pay for the improvements, and then after the improvements are finished, the ledner will release the improvement funds.
  6. If you used credit cards, a contractor’s account, or gifted funds, these could be paid off once the work is complete and the purchase plus improvements funds are released by your lawyer.
  7. The work typically needs to be completed within 90 days, but exceptions can be made.

Here are some of the main guidelines for purchase plus improvement program in the Canadian market:

  • Available for small or large scale improvements and new home construction.
  • Improvement financing available for up to 95% of the ‘as improved’ value of the home.
  • ‘As is value’ is defined  as ‘the market value of the property after improvements’. Market value would be determined by an appraiser after the improvements are complete.
  • Available for homes under $1,000,000.
  • Typically, the improvements need to be less than $40,000 or 20% of the purchase price of the home. However in some cases the amounts can be higher if the lender allows for it.
  • Lending is based on either the purchase price, or the improved value of the property: whichever is less. PLUS ‘direct costs related to improvements’.
  • An appraisal may be required to confirm the improvements and the new property value.

How to get the most out of a purchase plus improvement mortgage

Although the purchase plus improvement mortgage can be used for many things, such as upgrading a furnace or a roof, these types of improvements may not add as much to the appraised or market value of the home.

An appraiser will not typically value a new roof, for example as higher than the cost to install the new roof. I have seen these kinds of ‘at par’ or even lower valuations in other areas too, such as the installation of new gas piping.

In some cases, you may want or need to use the purchase plus improvement mortgage program to make a repair to a property you are buying for safety or reasons of general upkeep.

However, where repairs are not the concern, the following short list is areas of improvement that not only equal the cost of the improvement but may potentially be valued higher by an appraiser than the cost of the work.

Kitchen: New cabinetry, countertops, sinks and faucets, flooring, paint and backsplash.

Bathrooms: New toilet, paint, flooring and vanity.

Basement: Finished or partially finished including flooring, drywall, mudding and paint, ceiling and lighting.

More specifically, when looking at these kinds of high value upgrades, there is a ‘diminishing rate of return’ for improvement costs in these areas.

For example, the first $5000 spent on a kitchen may generate $7,500 in improved market value, whereas the next $5,000 spent on a kitchen (to total $10,000) may result in an additional $5,000 in improved value (or break-even). In other words, in this example, you got more bang for your buck on the first $5000 spent on the kitchen than the next $5,000.

The diminishing rate of return is very important when upgrading a home or using the purchase plus improvements program and the key thing to understand if you want maximum improved value is:

(1) Spend the least amount of money, (2) for the best looking upgrade, (3) at a reasonable quality.

How to avoid issues or potential loss from a purchase plus improvement mortgage

Along the same lines as the information above, the other side of the coin is avoiding situations where the market value of the improvements may actually come in as less than the cost of improvements.

A $1000 lighting fixture will not likely get you any more market value than a $100 lighting fixture. A $3000 heated floor will not likely get you any more market value than a $300 non heated floor. The $500 faucet will not likely get you any more market value than the $100 faucet. The list goes on

The point is, using luxury items with purchase plus improvements program may be nice, and may still be worth it for you by far. But the higher-end upgrades will not likely result in the most market value realized from the completed work.

At the furthest end of the spectrum is a property that is ‘over improved’ for the neighborhood that it is in. This happens when a home is upgraded far beyond any other home in the neighborhood, and other sales in the area do not support the value of the home that has been upgraded.

There is of course nothing wrong with upgrading a home with more luxury items if this has meaning to you, however, if you are looking at maximizing the value of your purchase plus improvements mortgage (or for any renovation project) then installing lower-cost fixtures or upgrades, that look good and with reasonable quality, should help you realize a stronger return.

Whether you are a buyer or a realtor, it is important to know about the options that may be available to you or your clients.

I would love to tell you more about this program and many others. Contact me today!

Konstantin Seroshtan

📲250.826.7626

📩 konstantins@dominionlending.ca

Home Appraisals: What They Are and How the Process Works

General Konstantin Seroshtan 23 Nov

As a buyer, one of the key parts of getting a mortgage is having an appraisal performed to confirm the home value for the lender (bank).

Why Lenders Want an Appraisal

An appraisal is an unbiased, professional estimate of the value of a property for sale. Lenders always require a home appraisal before they’ll issue a mortgage because they want to protect their investment; if the actual market value of a property is lower than the sales price and if the buyer defaults on the mortgage, the lender won’t be able to sell the property for enough money to cover the loan.

How the Appraisal Process Works

The appraisal usually happens after an offer has been made and the home has been inspected. As the buyer, you’ll pay for the appraisal and most likely have to arrange for it to be done as well. This is the case even though an appraisal’s purpose is to protect the lender, not you.

Once it’s complete, the report is sent directly to the lender.

The average cost of a professional appraisal is from $350 to $450 as of 2020. The price can depend on your property type and location. More expensive homes or homes that have more than one unit will typically cost more. Expect the appraisal process to take a few days. The appraiser should be a qualified professional who is licensed or certified to do the work and has no direct or indirect interest in the transaction. Typically the banks will have a list of select appraisers approved by them and often the appraisal company is selected randomly.

Using Comps to Determine Market Value

The appraiser should know the area the home is in and will analyze the neighborhood as well as the details and condition of the house to provide an assessment of the fair market value.

The most important component involved in arriving at a property’s value is called comparable sales, or “comps.” These are similar properties, usually located within a mile or so of the home in question, which have sold in the last 90 days.

The appraiser compares several of the property’s features against the comps to arrive at the value. Factors include square footage, appearance, amenities, and condition.

For example, a large four-bedroom home in an area where mostly three-bedroom homes have recently sold will likely have a higher value than those comps. Likewise, a house with peeling paint and a patchy lawn in a well-manicured subdivision will typically appraise at a lower value than otherwise similar properties.

When the Property Appraises for Less Than the Sales Price

Sometimes the appraised value of a house comes in lower than expected. This can affect several aspects of the sale.

If the lender is deciding your loan amount as a percentage of the property price, it will choose either the sales price or the appraised value, whichever is less. Most lenders won’t loan more than between 80% to 95% of the home’s fair market value, so the appraisal value of the home is important when it comes to how much you’ll be able to borrow.

If the property appraises at the same as or at more than the sales price, you’ll probably get the loan amount you applied for. But if it appraises for less, the lender will most likely reduce the loan amount to match the value of the home according to the appraisal.

Dealing With a Low Appraisal

A low appraisal can delay or even cancel a sale; buyers and lenders don’t want to overpay for a house, and sellers may not want to drastically lower the price they were hoping to get.

You have a few options if the appraisal comes in low. If you wrote your offer contract to include a contingency that requires that the property be valued at the selling price or higher, you can walk away from the deal.

If you’re buying, another option is to try to negotiate with the seller to reduce the sales price. A third alternative might be to put more money down to cover the difference between the appraised value and the sales price.

And you can always dispute the appraisal. Find out what comparable sales were used and ask your agent if they’re appropriate. Your agent might be more familiar with the area than the appraiser was and might be able to locate additional comps to support a higher valuation.

Great news is that you do not need to deal with this alone – you have me by your side!

Let’s talk mortgages!

📲250.826.7626

📩 konstantins@dominionlending.ca

Renters insurance?

General Konstantin Seroshtan 16 Nov

Adding a small addendum to your lease agreements, mandating coverage for renters, is a shrewd move to benefit all parties. Whether you’re a new landlord or longtime one, it’s smart to require your tenants to have renters insurance.

Here’s how this simple clause can save you from headaches, stress and worry.

How renters insurance protects your investment

As a property owner, you don’t need insurance by law, but you get it to protect your building, contents and even yourself from potential risks. A typical home insurance policy covers the building and accessory dwellings, third-party liability, personal property, and additional living expenses. Renters insurance, as is often noted, covers the renters personal belongings, otherwise known as contents insurance. But, there’s much more to it, including:

Third-party property damage

If your renter has a visitor whose property is damaged, the renter’s policy can pay for the repair or replacement. Therefore, the visitor has no reason to pursue you for damages costing you time and money.

Third-party liability coverage

Let’s say the guest injures themselves in your tenant’s suite. Their renters insurance can pay for the ambulance and other medical costs outside of a provincial health plan (e.g. physiotherapy, dental). Similar to the property damage, renters liability coverage ensures you’re not on the hook for any liable compensation.

Additional living expenses

If your renter can’t stay in their apartment due to extreme damage from something like a flood or fire, their renters insurance is designed to cover the costs of alternative living expenses while you have their unit repaired.

How landlord’s benefit from tenants insurance

  1. It can pay your deductible. If your tenants are responsible for any damage to your building, while you’ll use your insurance to pay for the repairs, their insurance can pay your deductible. This can save you hundreds, or even thousands.
  2. Keep your tenants protected!. Feel good by educating tenants (especially those moving out on their own for the first time) about protecting the myriad of gadgets they possess – from smartphones to TVs and laptops. They’ll be happy to have the coverage in place if anything happens, even if something is stolen while they’re travelling.
  3. Avoid the courts. We outline this above, but it’s worth repeating. If a renter has access to funds through insurance benefits, there’s no incentive for them to go after you. Accidents happen, and insurance can quickly solve disputes.
  4. Get cheaper landlord insurance. By requiring renters insurance, you can often get a discount because there’s inherently less risk for your insurance company.
  5. It’s affordable peace of mind. If the potential renter pushes back, it may serve as a red flag they have credit issues or lack financial stability. You don’t have to rent to them if they don’t abide by your lease and avoid potential disaster.

Knowledge is power

Even though you, as the owner/landlord, don’t need a tenants insurance policy, understanding what is and isn’t covered will allow you to better prepare for any future risks.

What’s not covered in a tenant’s policy

Earthquakes or floods from a sewer backup or snowmelt seeping into the basement isn’t covered, unless you add the coverage to your policy (or your tenants add it to theirs).

Illegal activity isn’t covered, so be sure to also stipulate zero tolerance in your lease.

Limits and exclusions

It’s worth mentioning that there are limits to their contents coverage on certain items. So, if they own expensive jewellery or ride top end road bikes, let them know they should speak to their insurance broker about upping their limits.

If a partner or roommate moves in, they should get their own insurance to protect their valuables as it won’t be covered under the existing tenant’s insurance.

If they sublet their space, they need to inform you and their insurer. The insurer may revoke contents insurance during the sublet as the risk of theft increases, but their liability will remain. If they choose to homeshare their unit, and you agree to it, they should purchase additional coverage from on-demand insurance companies, like Duuo’s short term rental insurance.

 

Separating And Have A Mortgage? Start Here.

General Konstantin Seroshtan 9 Nov

With the latest stats claiming that about half of marriages end in divorce and with around three-quarters of Canadians being homeowners, it’s important to know how to handle your mortgage if you decide to separate. Here’s a quick list of things to consider.

You need to keep making your payments.

A mortgage is a legally binding contract between you and the lender. It doesn’t take marriage into account. If your name appears on the mortgage, you’re responsible for making sure the regular payments are made. A marital breakdown does not give you an excuse not to make your mortgage payments.

If during your marriage, you have relied on your spouse to make the mortgage payments and you aren’t certain payments are being made after separating, it is in your best interest to contact the lender directly to verify your mortgage is being paid. If payments aren’t being made, it could affect your credit score or worse, the lender could start foreclosure proceedings.

There is always a financial cost to break your mortgage.

If, in the course of figuring out how to split your finances, you decided to either refinance your mortgage, remove someone from the title, or sell the property, keep in mind that there will be legal costs incurred.

If you’re in the middle of a term, the penalty for breaking your mortgage might be significant, especially if you have a fixed-rate mortgage. It’s certainly worth contacting your mortgage lender directly to verify the cost to break your mortgage. Having that information accessible when writing out your separation agreement will provide increased clarity.

Listing your marital status as separated or divorced.

When completing a mortgage application for securing new mortgage financing, when you list your marital status as separated or divorced, you can expect that a lender will want to see your legal separation agreement or your divorce papers. This is because they will want to ensure you aren’t responsible for any support payments to your former spouse. This can create a sticky situation, especially if you haven’t finalized the paperwork and could delay getting new mortgage financing.

It could be harder to qualify for a new mortgage.

With the separation of assets also comes the separation of incomes. If both of you have been working and you’ve qualified for your existing mortgage on a double income, you might find it hard to maintain the same quality of lifestyle post-separation as you will be reduced to being a single income household.

This is where careful planning comes in. Working closely with your independent mortgage professional will make sure you understand exactly where you stand and if you can qualify to take over the mortgage on the matrimonial home or what other options you might have.

Purchasing the matrimonial home from your ex.

There are special considerations given to people going through a separation to buy out the matrimonial home. Instead of looking at the transaction like a refinance where you can only borrow up to 80% of the property’s value, lenders will consider one spouse buying out the other up to a 95% loan to value ratio. This comes in handy when dividing assets and liabilities.

If you’d like to discuss your mortgage options, please contact me anytime.

📲250.826.7626

📩 konstantins@dominionlending.ca

 

WHY BORROWERS CHOOSE PRIVATE MORTGAGE LENDERS

General Konstantin Seroshtan 1 Nov

More Canadians have started to turn to private lenders in search of mortgage financing. With mortgage regulations continually becoming stricter and tightening the lending gap, many would-be homeowners are being squeezed out of their dreams.

Private mortgages abide by a similar set of parameters as the ones commonly imposed by many banks. However, these parameters are less rigid and allow for more creative financing scenarios. There are many financing cases that simply cannot be categorized according to a predefined set of standards that don’t allow for any compromise. These parameters are seldom updated and given the size of the large banking institutions, it makes sense how it would be difficult for them to pivot to adapt to changing consumer demands. Smaller and more nimble financiers are able to make exceptions and adapt a product box around a consumer’s needs as opposed to trying to jam a consumer within a box.

Canadians are seeking out private lenders for not only mortgage financing but also refinancing.
They may be looking to take advantage of an increase in home equity in order to develop an addition to their detached house. This is another scenario that may fall outside the lending guidelines of many traditional lenders.

Common private mortgage scenarios

A traditional bank requires extensive documentation supporting your ability to repay the loan. Their criteria will rule out many borrowers. For instance, self-employed applicants will not always have W2 forms and consistent pay stubs that a lender typically requires, and as such are subject to automatic disqualification.

Some common private lending cases include:

  • Rental investment properties
  • Multifamily (i.e. four-plex) properties
  • Second mortgages
  • Self-employed borrowers
  • Unverifiable employment income
  • Non-residents
  • Low credit score
  • Higher debt load than acceptable by banks
  • Construction financing
  • Vacation homes
  • Interim financing

Here’s a typical scenario that private lenders see. A mortgage prospect is nearly complete with the construction of a new home, and they’ve gone over their projected budget. Their bank, which has already extended a mortgage, has turned down their request for additional funds. How are they to fund the remainder of their home construction? One option is for them to consider a private lender.

Private mortgage restrictions and requirements

Many private lenders specialize in a particular market niche in which they are comfortable lending. A lender may only dabble in construction financing as they have expertise in home construction and may feel more comfortable in this lending scenario compared to a lender that only wishes to lend second mortgages on residential homes.

Lenders may also impose geographic constraints within their lending criteria. They may restrict their lending policy only to avoid smaller townships. There is no one defining a global lending policy that is agreed upon by private lenders or by which they are regulated. They set their own conditions and policies, and it is advisable for borrowers to seek a private lender that fits their particular circumstance not only to get more favourable rates and terms but also to take advantage of a quicker loan fulfillment process.

In terms of qualification criteria, private lenders are considerably more flexible compared to banks. Private loan applicants will find less documentation and restrictive measures heavily focused on the applicant. Employment documentation and credit history are not as critical as long as you can prove that you have the financial resources to make the necessary loan payments. The primary concern of the lender is the equity in the asset against which you are seeking a loan. Meaning, if you have $40,000 in equity on a $100,000 home, and the lender is comfortable leveraging your home up to 75% (sometimes 80%), then you would be eligible for a second mortgage of $15,000 in this scenario.

Another typical requirement from private lenders is an exit strategy indicating how you intend to repay the loan at the completion of your loan term. Essentially, a borrower needs to convince the lender of how they will repay the loan and what the source of those funds will be.

Some common exit strategy examples include:

  • Renovate and resell (fix and flip)
  • Develop a home on a vacant plot of land and refinance
  • Credit score is low, but the borrower is going through a debt consolidation process to improve credit score
  • Have another property listed for sale and require interim financing until that sale
  • Awaiting inheritance or a legal settlement

Private lender fees

Because private lenders are taking on higher risks, they also charge higher interest rates when compared to the banks.

The interest rates vary among private lenders and can range from a few percentage points above a bank’s rates to double-digit rates. The rate depends on a multitude of variables that contribute to the level of risk associated with the loan. These variables typically include the equity percentage in the property, mortgage position (i.e. first, second), property type as well as what degree of documentation is provided. The lower the equity percentage in the property, the higher the risk exposure undertaken by the lender, and hence, the interest rate charged to hedge against that risk is also higher. This equity is the lender’s primary form of security in case of loan default.

When coordinating a mortgage loan process via a mortgage broker that secures a loan from a traditional lender, the broker’s fees are paid by the bank directly. In the case of a private mortgage, the borrower is responsible for covering these fees directly. The fees in question typically range between 1-3% of the loan amount. Many lenders allow for these fees to be financed as part of the mortgage loan. They are simply tacked onto the mortgage loan.

Working with a private lender

As most private mortgage loans are short-term loans ranging between one to two years, it is in the best interest of the private lender to try and help the borrower transition to a prime lender following the end of the private loan term. If the borrower has a low credit score, a lender with a qualified team of mortgage brokers will help monitor the credit score and ensure it is rising. This assistance can come in the form of debt consolidation to simply monitoring and developing a plan for the client to ensure that they are impacting their credit score by paying down their debts. Working with a private lender that also houses a mortgage brokerage team dealing with prime lenders helps clients with the transition process and also incentivizes the firm to align the client’s success with their own.

With rising interest rates and ongoing new mortgage regulations squeezing many Canadians out of homeownership, more Canadians are turning away from traditional bank lenders to alternative financing solutions. Whether they are self-employed, have unverifiable income, or unestablished credit, alternative options are becoming more prominent and mainstream. It is advisable to seek out a private lender with a diversified team that not only specializes in private lending but can also allow you to leverage their team of mortgage brokers to bridge the gap between private and traditional lending.

Not every private lender is the same and there are a lot of factors to be aware of. Do not go for a swim in the ocean of private lending without a mortgage broker.

Contact me for a free consultation!

📲250.826.7626

📩konstantins@dominionlending.ca