Are you looking at making improvements to your current home or raising your property value? If so, you may want to consider a renovation mortgage. A renovation mortgage is very similar to a purchase loan. It is a mortgage used to pay for the costs of remodeling your home; however, it differs because it uses different factors to determine eligibility.
Purchase Plus Improvements
A Purchase Plus Improvements mortgage allows the borrower to add funds to the property’s purchase price expressly to improve the home.
The improvements must be those items that typically improve the overall value of the home. Things like new flooring, bathrooms and kitchens are definitely on the list. On the other hand, it’s not likely the lender will approve putting a hot tub on the roof.
Refinance Plus Improvements
Like a Purchase Plus Improvements mortgage, a Refinance Plus Improvements mortgage is for current homeowners looking to update their homes.
Compared to simply putting a Homeowner Equity Line of Credit on your property, the benefit to this product is the interest rate. With a Refinance Plus Improvements mortgage, the funds will be at a lower rate. Lines of Credit typically have higher rates than conventional mortgage products.
Both of the products mentioned above have a specific process to follow to keep the lender happy.
Application and Approval
At the mortgage application stage, the file must include renovation quotes for the proposed work. Written quotes must be obtained for each improvement, even if the same contractor is doing all the work. The reason is that your lender might not approve all of the desired improvements, or the lender might not approve the total requested amount. Therefore, it’s advisable to sort your improvements in order of preference. Suppose one or two items have to fall off the bottom of the list. In that case, the renovation can continue with the essential items.
The lender will add the improvement value to the purchase or current value to arrive at the improved mortgage value. Please note that there may be limits on how much improvement value a lender will allow. A general rule of thumb is 20% of the current house value. Improvement values can vary by lender, and it’s best to consult with your Mortgage Broker early in the process. There may also be government incentives in the form of rebates offered to update your home.
Once your mortgage is approved, the lender will require an appraisal of the property as part of the immediate conditions. Your mortgage broker will provide the appraisal company with the price quotes with the scope of work improvements. The appraisal report will include a current home value in its “as is” state and a future value of the house with the proposed improvements. Once the lender approves the appraisal report, the work can start.
Held in Trust
Most lenders will require the improvement funds to be held in trust by your Real Estate Lawyer. Borrowers will need to pay for deposits in advance of accessing the funds from the lender. The improvement period should take no longer than three months from the time of mortgage approval. When the improvements are finished, the original appraisal company will visit the home and issue a certificate confirming the completion of work as outlined in the original appraisal report. The lender will authorize the Real Estate Lawyer to release the funds to the homeowners to pay their contractors.
Does this sound like a demanding process? It’s not that bad. Many borrowers have their dream homes due to programs like these. Contact your Mortgage Broker to discuss your options.