Steven Crews
(403) 870-2669

Purchase Plus Improvements Mortgage, A Great Way To Buy Your Dream Home

The Purchase Plus Improvements Mortgage is, in my opinion, completely under-utilized by home buyers in Canada! I explain this program to every home buyer I meet and I have had so many success stories from clients who have used it.

The Purchase Plus Improvements Mortgage allows a qualified purchaser to include the cost of the home plus the improvements when calculating the qualified mortgage amount. Purchasers can include up to 20% of the home's purchase price to a maximum of $40,000 for their improvements.

When we purchased our first home, I wasn't aware of the purchase plus improvements program. We searched every weekend for many months and couldn’t find one that was right for us.  Five to six homes every Saturday for 8 to 12 weeks straight.  The realtor was probably getting tired of us.

We ended up visiting a new home builder and built a semi-custom home.  The Builder's show home was beautiful. We could pick our colors. We could pick the flooring, the floor plan, we could make a home that we wanted instead of settling for an old home.

What we didn't realize was all the hidden costs when purchasing new...  The window coverings, landscaping, the fencing, the deck were all items not included in our original purchase price.  All these extra costs added up.

After 5 years in this new home, the community was building up around us but we were still really far from everything.  It was time to move closer in, to an established community, 20 minutes closer to work, with mature trees, closer to schools, shops, etc..

The home we found was built over 30 years ago.  The inside was dated, but we decided we could renovate.  This time, I knew about the purchase plus improvements program.

I was able to purchase the home and also get financing for $40,000 to renovate the home. I updated the flooring and the kitchen.

As an example, the purchase price was $400,000 and the renovation quote was for $40,000. The total purchase price for my home was therefore $440,000. If I chose the minimum down payment, I could give $22,000 (5% of the total purchase price) and finance the rest.

$40,000 would be held by the bank until the renovations were completed, then the bank will instruct the lawyer to release the money to me to pay for the renovations.

Let me summarize the keys to success:

  1. The Bank will finance the lesser of 95% of the total purchase price plus renovation costs or the appraised value
  2. Maximum renovation cost is the lesser of 20% of the purchase price or $40,000 (although, recently some lenders will allow more than $40,000)
  3. You must submit all estimates and quotes for the improvements up front, when qualifying for the mortgage
  4. You must use the same contractor to complete the improvements who provided the quotes
  5. The improvement funds are held back until renovations are complete
  6. Funds are released once an inspection is done to confirm completion of the project
  7. You must also provide receipts to the bank to confirm what has been paid by you.

During the purchase process, the home buyer needs to get a list of estimates for the work that they want to have completed.  When applying for the mortgage, include the estimates.  These estimates are added to the purchase price of the home.  The lender and the insurer will review the total purchase price and estimates to determine the home’s value.

The Bank will finance the lesser of 95% of the total purchase price plus renovation costs or the appraised value

If the home’s completed value is equal to or greater than the total cost of the home plus the improvements, then the purchaser can get financing up to 95% of the total cost.  If the home’s completed value is less than the total of the purchase price plus the estimates, then the lender will finance up to 95% of the completed value and the purchaser will have to use additional funds to pay for the short fall.

Maximum renovation cost is the lesser of 20% of the purchase price or $40,000

Most lenders will state that the maximum amount of financing available is the lesser of $40,000 or 20% of the purchase price, however some lenders will make exceptions to allow a higher amount.

Each lender is different and some will not make this exception. When calculating the amount available, the lender will order an appraisal to ensure that the improvements are at least equal to the improved value. If the improvements do not increase the property value enough then the maximum financing available would be to the total appraised value.

You must submit all quotes up front.

With the purchase plus improvements program, it's important to provide the quotes to the lender up front. They want to know what you are doing and how much value will be added to the home once the improvements are completed.

There is more risk to the lender with this type of financing and they have to be more careful to ensure that everything is being completed as described in the estimates.

You can’t change contractors midway through your project without approval.

It’s important to use the contractors that you get the quotes from.  The lender doesn’t offer a bait and switch program.  If you want to switch contractors, then you must provide new quotes to the lender and to have them review and approve the changes.

This type of change could require a new appraisal and will definitely require an underwriting decision. As I mentioned before, there is more risk to the lender with the purchase plus program, therefore more due diligence is required by them to make sure the project proceeds as planned.

I generally recommend that my clients find a general contractor or interior designer who will organize all the trades people required.  This way you only have 1 quote to deal with.  The General contractor would have a couple of trades people that they use for each job and this would give you some flexibility if scheduling becomes an issue.

The funds to cover the cost of improvements is held by the lawyer until the work is completed.

When you purchase the home, the lender will release enough funds to your lawyer purchase the home, less your down payment and the cost of the improvements.  These funds will typically be held by the lawyer until your renovations are completed.

This means that you should have funds available to cover some of the renovations, or at least have access to funds through a line of credit to pay deposits or to pay for materials.

It’s really important to make sure you don’t pay your general contractor too much money up front.  Paying for material that is in your home, or paying a deposit for work to be completed is reasonable, but don’t pay too much. You want to make sure you are paying a reputable contractor.

One of my clients decided to renovate their home after living there several years.  They hired a contractor to complete the work for them.  The contractor asked for 75% deposit up front.  Once they paid him, they never heard from him again.  They are still trying to get their money back.  That was an expensive lesson for them.

Submit invoices and a property inspection to your mortgage broker and the solicitor to release the funds

Once the work is completed, the lender will want confirmation before they release any additional money to you.  Generally, the lender will order a home inspection to be completed.

The home inspection confirms that the work is completed according to the quotes. The lender will also ask for your paid receipts and invoices.  This is to confirm whether they pay you directly or if they direct money to the contractor. The lawyer is responsible to ensure that all contractors are paid and no liens have been registered against your home.

Never buy a home again, without considering purchase plus improvements as a financing option

I explain this program to every client \who is looking to purchase a home. It's ideally designed for purchasers with less than 20% down, but every purchaser could utilize the program. If you are purchasing a brand new home or custom home and your builder is completing everything for you, then this wouldn't be the best option for you.

The advantage of the program is that your home choices open up. You don't have to look for the perfect home. In fact, you can look for one that is a little run down, negotiate a better price and then use the extra financing to make that home perfect for your family.

Few homes listed for sale are perfect and most need something to make them perfect to meet every criteria on our check list.  I have found that many of my clients now look in the neighborhood that they like and in the price range they are comfortable with.

Here is a list of potential renovations that my clients have done (to name a few):

  • New Flooring (carpet/hardwood)
  • New Trim & wainscoting
  • New Furnace
  • Paint (inside & outside)
  • Kitchen renovation
  • Bathroom renovation
  • Basement renovation
  • New garage
  • Reconfigure walls to create open plan
  • New roof

There are a couple of popular television shows that highlight home buyers who choose “fixer upper homes” then renovate to beautiful family homes.  Now you know how they financing these costs, without having to save so much cash up front!

One thing to note, this program isn’t exclusive to home purchasing.  You can also include renovation costs into your mortgage when you refinance.  The only difference is that when you refinance you home, the maximum financing available is to 80% of the home’s value, instead of 95% for a purchase.

One thing to note, this program isn’t exclusive to home purchasing.  You can also include renovation costs into your mortgage when you refinance.  The only difference is that when you refinance you home, the maximum financing available is to 80% of the home’s value, instead of 95% for a purchase.

Happy house hunting!

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