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:
- You can get a mortgage approved with as little as 5% down payment, and include some home improvement costs into the mortgage amount.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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!