When buying a home, you might find a property that needs some updates or repairs. A Purchase Plus Improvements mortgage can be a great solution for these situations. However, this mortgage product is often misunderstood. This guide will explain how it works, the requirements, and how you can use it to buy and improve your new home.
What is a Purchase Plus Improvements Mortgage?
A Purchase Plus Improvements mortgage allows you to borrow additional funds on top of your mortgage to cover the cost of renovations. This is especially useful for homes that are dated or need repairs. Here’s how it works and what you need to know:
Key Requirements
1. Renovation Limits: Renovations cannot exceed 20% of the house price or $40,000, whichever is less. If the renovations exceed this amount, you will need to pay for the remainder yourself, as it cannot be built into the mortgage. There is an exception to this though as there are a couple lenders that may offer up to $100,000 for renovations, but it is more complex and it would limit your lending options. The renovations must be for items that are fixed to the home. For example, if you are looking to purchase appliances, then this wouldn’t be covered. However, if you were looking to replace the cabinets and countertops, these upgrades would be covered.
The idea is that you will be increasing the value of the home through the cost of the improvements. Sometimes the lender will decline some of the renovations if they don’t feel that they will bring additional value to the home. Every situation is dealt with on a case-by-case basis, and it also depends on the initial value of the home. For example, if you were looking to spend $20,000 on paint and a chandelier, then you can likely expect this to be declined. However, if you are looking to lay all new flooring or add/remodel a bathroom, this is viewed much more favourably by lenders.
2. Quotes Provided Upfront: All quotes must be provided upfront with the offer on the home. Once you have an accepted offer on the home, you will need to get the quotes right away. This tends to be one of the more challenging aspects to coordinate, but a mortgage commitment will not be granted until these are provided. The lender needs to know the exact dollar figure to build into the mortgage, and they also need to verify that the scope of the work is expected to increase the value of the home. If you are looking to apply for this program, you will need to get the quotes ASAP.
3. Time Frame for Completion: You have 120 days to complete all the work after the closing date. Once the closing date on the home arrives, you then have 120 days to complete all the renovations. I highly recommend that you do not exceed this time frame, as the lender can cancel the reimbursement for renovations. In that scenario, they would deduct it from the mortgage. If you have concerns that you might not complete it on time, then be sure to inform your broker right away—do not leave it to the last minute!
4. Upfront Payment: You are required to pay for the renovations from your own funds. This is one of the most common misconceptions of the program. Clients often think that they will receive the funds to complete all the work as they wish on closing. Do you see the issue here? The lender has no way to ensure that the work gets done. That Purchase + Improvements money could easily turn into Purchase + Vacation money for some.
5. Proof of Completion: After the work is completed, a paid invoice or an inspection report proving the work has been completed will need to be provided. There are two ways the lender can verify that the work is complete: a paid invoice or an inspection report. Sometimes the lender mandates an inspection report or gives the option between the two. Typically, if you are doing the work yourself and the quotes are for materials, then they will require an inspection report at your cost. You must ensure that the work listed in the quotes is completed on the home. If you don’t complete 100% of the work as stated, you may jeopardize the release of the funds. Also, if you get a quote from one contractor and then decide to use someone else, you will most likely need to obtain an inspection report over the new paid invoice.
Breaking Down the Requirements
Renovation Limits
If the renovations exceed 20% of the purchase price or $40,000, you will need to cover the extra costs yourself (with the exception of a couple lenders that will allow up to $100,000). The renovations must be for fixed items, like replacing cabinets or countertops, which add value to the home. Lenders may decline renovations that don’t add significant value, such as painting or installing chandeliers.
Quotes Provided Upfront
You need to get quotes for the renovations right after your offer is accepted. This can be challenging, but it’s necessary for mortgage approval. Lenders need to see the exact costs and scope of work to ensure it will increase the home’s value.
Time Frame for Completion
You have 120 days after the closing date to complete the renovations. It’s important to stick to this timeline, as failing to do so could result in the lender canceling the reimbursement for the renovations, which would then be deducted from your mortgage.
Upfront Payment
You must pay for the renovations with your own money first. The lender won’t release the funds until the work is completed and verified. This ensures that the money is used for its intended purpose.
Proof of Completion
After completing the renovations, you’ll need to provide either a paid invoice or an inspection report to the lender. This verifies that the renovations are done and match the initial quotes. If you switch contractors, you may need an inspection report instead of a new invoice.
Real-Life Example
Imagine you find a home that needs a new kitchen. The purchase price is $300,000, and you get quotes totaling $30,000 for the renovations, which is within the 20% limit. You include these quotes with your offer and, after your offer is accepted, you proceed with the renovations. You pay for the renovations yourself and complete them within 120 days. Once the work is done, you provide the lender with a paid invoice and an inspection report. The lender then reimburses you the $30,000 for the improvements.
Frequently Asked Questions on Purchase Plus Improvements
Can I use a Purchase Plus Improvements mortgage for any type of renovation?
No, the renovations must be fixed to the home and add value. Items like appliances are not covered, but replacing cabinets or countertops would be.
Do I get the renovation funds upfront?
No, you must pay for the renovations with your own money first. The lender will reimburse you after the work is completed and verified.
What if I can’t complete the renovations within 120 days?
If you think you might not finish in time, inform your broker immediately. If the work isn’t completed within 120 days, the lender may cancel the reimbursement.
Conclusion
A Purchase Plus Improvements mortgage can be a great way to buy a home that needs some work and make it your own. By understanding the requirements and planning carefully, you can use this mortgage product to your advantage.
If you have any questions or want to explore this in further detail, please feel free to reach out to me, Alex Lavender. I would be more than happy to assist you, and there is no cost or obligation for a meeting with me.