Turning houses into homes

By Tracy Head

Why not make their house your dream home?

Have you thought about a home that has most of the items on your wish list, but needs a little TLC?

Many lenders offer a Purchase Plus Improvements program that is designed for people who want to buy a home that needs a little work. Maybe it needs a new roof, central air, a new furnace, new siding, doors, windows, a new kitchen, flooring or any other renovation that would increase the value of the home. 

This can be a great option if you find a house you love, but realize that it will take some time to save for the renovations you want to do.

Let’s assume that you are a first-time buyer and have a five per cent down payment. The way it works is this … before the mortgage financing is arranged, you gather written quotes from licensed contractors or suppliers for the work to be done.  

Your mortgage application is for 95 per cent of the total cost — purchase price plus the improvements.

At closing time, the lender will send the money needed to purchase the home as well as the money for the renovations to your lawyer.

The lawyer will take care of the purchase, and you will receive the keys to your new home. The lawyer holds the money for the renovations in trust until the work is finished.

Now the fun starts; you get going on the renovations. You will need to cover the costs for the short term. Most people use either a credit line or a zero-interest hardware store card to help with cash flow.

Once the work is done, an appraiser will come through to confirm that everything is finished. At this time the lender will give the lawyer the OK to give you the rest of the money to pay off the credit line or charge card and pay your contractor.

Let’s go through an example…

• Purchase price:                $400,000 X 95% =     $380,000
• Cost of improvements:     $ 40,000 X 95% =      $38,000
• Total mortgage:               $440,000 X 95% =     $418,000
• Down payment:                $440,000 X 5% =       $22,000           

In this case, your mortgage will be $418,000, which is 95 per cent of the purchase price plus 95 per cent of the improvements.

On the closing date, your lawyer will receive $418,000 from the lender. You will have already brought in your down payment of $22,000. ($418,000 + $22,000 = $440,000, which is the purchase price plus the cost of improvements).

Your lawyer will transfer $400,000 to the seller’s lawyer, and you are the proud owner of a new home. Your lawyer will hold the money for renovations in trust ($40,000) until you are finished the work.

If you bought this home and planned to do the renovations later, your down payment would be $20,000, your mortgage would be $380,000, and your monthly payment would be about $1,700. Somewhere down the road you would need to find $40,000 to do the renovations.

Using the Purchase Plus Improvements program, your down payment would be $22,000 and your monthly payment would be about $1,870.

At the end of the day, you have a mortgage of $418,000 and a beautifully renovated home.

Everybody wins. The lender is happy because the value of your home has increased. More importantly, you are happy because you were able to do major renovations to your home ($40,000) with a cash outlay of only $2,000 (five per cent of $40,000) upfront.

You get to enjoy an updated home right away.

The process generally goes very smoothly. If you have any questions about the Purchase Plus Improvements program, I’d love to go over it with you.

Tracy Head is a mortgage consultant with Verico Complete Mortgage Services. She can be reached at 250-826-5857.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.