The ins and outs of renovation financing

So you have found a great house.

The neighborhood is wonderful. Mature trees, lower property taxes, schools within walking distance and easy access to a variety of amenities. But the house, how do we put it, is retro at best. You wonder how you will tolerate the bright pink carpets and the vast array of energy inefficient items has you wondering if you will be able to pay the astronomical heating bills.

What now? Should you look for something newer? No way my friend, there is a mortgage product made just for this situation and this week we are going to take a look.

Purchase Plus Improvements is the name of this product and this is how it works. You head out with your realtor to choose the best house for your needs. You write up an offer and bargain your way to the best price.

In the meantime, you contact a qualified contractor or other service providers to get quotes for the work you would like to do. These quotes are provided to the lender as a part of the financing process. The lender reviews and provides the thumbs up.

But you before to rush out to do just this you really need to know a few things.

– The day of possession the funds are transferred for the purchase of the home so you are able to move in and start the renovations. The balance of the funds are held in trust with the lawyer and will not be released until the work is 100% complete. An appraiser will be sent to your home to verify the work is done. You may want to arrange access to a line of credit so you will be able pay for any deposits or other costs in the interim as you will only get the funds upon completion.

– There is a maximum amount you are allowed. Most lenders will allow you $40,000 or 10% of the home’s value as your renovation budget.

– You will have to have at least 5% of the improved value to put down. For example, if your new home costs $300,000 and you are going to do $30,000 of improvements, you will need to have $16,500 down instead of $15,000.

– Not all improvements you propose will be acceptable to the lender. The travertine tile imported from Italy may be gorgeous but it does not necessarily add a dollar for dollar value. Lenders like new kitchens, flooring, bathrooms, siding, windows, furnaces, garages, roofing or other substantial upgrades. They will sometimes allow appliances or landscaping but this is a case by case decision

– You must do the upgrades you said you would do to get the funds. It has happened that once a homeowner took possession of their home they opted to make different improvements, however the lender is not likely to release the funds for work they did not agree to in the first place.

– There is a time restriction. Most lenders allow only 90 days for the work to be completed. If some of the work is seasonal you should make sure your lender will allow a relaxation on the restriction.

This product can also be great for people purchasing a brand new home. This is a easy way to get the funds you need to finish the basement or the fencing.

There is also a similar program for homeowners looking to upgrade their existing home. In this case, the value of the home is determined via an appraisal ‘as is’ and on an ‘as is complete system’. The current mortgage is paid out and the balance of the funds is held in trust with the lawyer until the work is complete.

The really nice part of this program is that you are able to borrow the funds to complete your renovations at today’s very low rates and your mortgage payment will be only slightly higher.

So there you have it. A simple way to get the funds you need to turn your house into your dream home. Your mortgage professional can answer the questions you may have about this program.

Pam Pikkert is a mortgage broker with Dominion Lending Centres – Regional Mortgage Group in Red Deer.

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