Are you thinking about buying a diamond in the rough to transform into your dream home? No doubt it’s easy to be tempted by all of the magical home makeovers that are seen on the home improvement shows these days. With home values rising this could be a great way to make home ownership a little more affordable for some by buying in a neighbourhood that is undergoing a transition.
Obviously you need to avoid buying a money pit. Working with professionals will ensure that the improvements you are considering will be worth it in the end to improve the value of the home. You don’t want to over-renovate the home for the area so avoid renovations that just won’t be worth it in the end.
But how do you afford to do a renovation? When you purchase the home you will need sufficient funds for the down payment and closing costs. You take possession of the home and if you don’t have the cash set aside you will then need to secure a home improvement loan or perhaps use a line of credit. It could be difficult to qualify for additional financing when you have just purchased a home and these options can also be expensive.
The great news is that there is an affordable solution – there are insured mortgage programs that require as little as a 5% down payment that will allow you to borrow up to 20% of purchase price for improvements. If the improvements are over $40,000.00 then a full appraisal is required and advance draws will be managed by the mortgage insurer. The property value must be less than $1,000,000.
The value the lender will lend on is based on the lesser of the improved value of the property or the purchase price plus the direct costs of the improvements. The improvements must increase the value of the home once completed.
Here are the steps that you need to take:
Obtain a mortgage pre-approval from a mortgage professional to determine your maximum approval amount.
Find a home and have a general idea of what renovations need to be done as well as their cost. The purchase price plus the renovation cost cannot exceed your maximum approval amount for a mortgage. Lenders will request written quotes to be provided, detailing the work to be done, as well as the cost.
Once your offer is accepted, you will need to provide the accepted purchase offer, as well as the quotes for the improvements, to your mortgage broker. A financing request will be sent to the lender which includes the cost of the renovations.
Once you take possession of your home, you can begin the renovations. The Lender will instruct the Solicitor to hold the additional Renovation funds, until the lender confirms the works has been completed. Once the renovations are completed an appraiser will complete an inspection to verify the work is completed as per the quotes.
The lender will receive the inspection report from the appraiser, and validate that the work has been completed in a good manner. They will instruct the lawyer that they are able to release the funds to you to pay the contractor.
If the property is valued at more than $1,000,000 then there are other options available to complete renovations.
If you would like to see if this program can help you affordably turn a fixer upper into the home of your dreams, give me a call. I’ll provide an analysis of your needs and financial situation to complete a mortgage preapproval.
This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.