Thinking of buying a fixer-upper? Here's how...

If you've been trying to find that perfect home, but no place you've looked at in your price range seems quite right, here's a way to buy and renovate for the perfect abode.  Think of it as a mortgage for fixer uppers.

It's called a “purchase plus improvements” mortgage.  This type of mortgage covers the sale price of your home, plus any renovations that would increase the value of the property, with as little as 5 per cent down.

Many homebuyers looking at older properties find themselves in the same boat: they’ve found a property that suits them, but it needs some costly and immediate upgrades.

You may be able to add the costs of those immediate renovations into your mortgage, instead of racking up credit card bills, department store or home renovation store cards, or selling investments to pay for the upgrades.    If you’re buying a home but want to add a garage, finish a basement, replace windows or wiring, or redo a kitchen, it can make a lot of sense to add those costs to your mortgage. That way you can spread your payments over the life of the mortgage and have a cost-effective way to get your dream home. You can also use your pre-payment privileges to pay the renovation off faster, when the expenses of the renovation are behind you. 

The process is quite straightforward.  Here are the main steps you will take:

Include a longer "financing clause" in your offer to purchase
Once you have found a home and decide to put in an offer, you should ask for a little extra time to finalize all the financing details for your home purchase - ideally 10 days.   This gives you time to get quotes and get the lender's approval on the improvements you intend to make to your property.

Obtain estimates for the upgrades
At the same time as you submit your purchase for approval with the lender, you also need to provide detailed written quotes from licensed contractors, for the renovations you plan to do.  These quotes should outline the scope of the work, and all costs. 

Get your appraisal
An appraisal with two separate values will be required: first the value of the property "as is" and the estimated value of the property once the improvements are completed.

Renovation costs are included in your mortgage
Your lender will add the estimated costs of the renovation into your mortgage. For example, with a 5% down payment, your mortgage broker would apply for 95% of the “as improved” market value, which will be higher than the actual purchase price. The committed amount of the mortgage will be advanced to your real estate lawyer, who will be instructed to hold back the renovation funds until the work has been completed and inspected.

Complete your upgrades, and receive the remainder of your funds
Once an inspection from an appraiser confirms all work is complete and a copy of the building permit (if applicable) has been received, the balance of the mortgage funds will be released to you to pay for the renovations. There are a few options for carrying your expenditures until the funds can be released. Some major home improvement retailers offer “no payment” options for up to six months. Larger contractors may also be willing to finance the project short-term if they see the documentation for purchase plus improvements financing, and receive a deposit.  Other people are able to get a short term loan from parents or a family member.  What you can't do is get the mortgage funds ahead of time - the lender can't lend you more money than your property is worth, so they have to wait until the property is actually worth the "improved" amount. 

Here is an example of how this works in real life:

Purchase price of home: $400,000
Improvements required: $40,000
Total mortgage: $418,000 (95% of $440,000)
Your down payment: $22,000 (5% of $440,000)

$378,000 will be advanced on your closing date, so that you can take ownership of the home.   At the same time, you will be required to pay your down payment in full.  You then do the improvements.  Once you get an inspection confirming that they have been completed, the remaining $40,000 will be released.  

If you think this might be a good option for getting you the perfect home, please contact your mortgage professional to discuss the ins and outs.  There are lots of aspects to this type of mortgage that you can take advantage of - for example, some lenders will also allow you to get a portion of funds advanced to you at certain stages of completion, rather than requiring you to wait until full completion.  As well, some lenders require that the work be completed in a certain period of time after your closing date, while others are more flexible.  Depending on your specific situation, we can find you a lender and product that will help you achieve your goals.

Happy house-hunting!




~ Powered by Mortgage Intelligence

Photo credit: [c] Sean Farrell for openphoto.net

Why use a mortgage broker?

You're ready to buy that home.  Your next step is to go to your local branch of one of the big banks, right?  Or do you just apply for a mortgage online to get the best deal?

The answer is: neither.  That is, unless you have lots of time and expertise to comparison shop and negotiate the best terms and rate for you.  For most of us, a mortgage is the single biggest debt we will ever take on.  Whether you're borrowing for the first time, or refinancing an existing mortgage, studies show that negotiating and shopping around can save thousands of dollars over the life of your mortgage.

So what can a mortgage broker do for you?

Here are seven ways we can help:

1.  We have negotiating power
Brokers deal with multiple competing lenders and can often access exclusive rates. We also have the power to negotiate rate discounts from lenders, which we pass on to our clients.

2.  We give you choices and knowledgeable advice
You don't need to become a mortgage expert.  Brokers offer consultative service, advice and solutions that are customized to each client’s needs. And unlike banks, we work for you.

3.  We save you time
We will work around your schedule to make the transaction as quick and easy as possible.

4.  We save you money
In most cases, our professional advice and assistance is free! We're paid by the lender for placing you with their products.

5.  We pre-qualify you
Whether you're shopping for a new home, or refinancing your existing mortgage, we can help you obtain a pre-approved mortgage, often with up to a 120-day interest rate guarantee, to protect you from rising rates.

6.  Preserve your credit rating
When you shop for a mortgage, there is an accumulation of lender inquiries on your credit bureau report, possibly affecting your credit rating and, ultimately, the rate and terms of your mortgage. This isn’t the case with a mortgage broker, who only does one inquiry yet can still get many competing lenders to quote on your business.

7.  Peace of mind

The Canadian Association of Accredited Mortgage Professionals has a stringent Code of Ethics that members are required to adhere to in order to retain membership.

If you have any questions or comments for me, I would love to hear from you! 


Photo credit: [c] Michael Jastremski for openphoto.net