By Jillian Drummond, Mortgage Architects
Imagine you’ve been looking at houses for a while and there is one you just can’t get off your mind, but there is something about it you just couldn’t live with.
Maybe the roof is in really rough shape, or the windows are rotting, or the kitchen or bathroom are just plain ugly, or the flooring is worn, the list goes on…
There is a mortgage for that!
It’s called Purchase Plus Improvements and it allows you to borrow additional funds on top of the purchase price of the home in order for you to renovate the area(s) of concern.
Once you have found the house you like, you will need to have a contractor issue a quote for the renovations to be done. It would be a good idea to get 2 or 3 quotes to make sure you are being quoted fairly, as you will have to repay these fund after all. Make sure to check reviews and references as well to ensure quality workmanship and service!
It would be wise to consult a real estate professional who could tell you what improvements would make the biggest impact on the homes value so you can maximize your return on investment.
As a general rule, Purchase Plus Improvement funds cannot be used for items that can be removed from the house. The purpose of the funds is to increase the value of the property, so it could not be used for things like appliances or hot tubs as they can be easily removed from the house, removing the value along with it.
The amount of money and length of time given to complete the renovations vary from lender to lender, so it’s best to consult with a mortgage professional to determine what the best option is.
The pros? You can fund your renovations with “cheap” mortgage money at a lower interest rate than a line of credit or an unsecured loan and you can extend the repayment over the life of the mortgage, typically 25 years.
The cons? You need to be able to qualify for the additional funds by staying within the required debt service ratios. You will also need enough money available to pay the initial lump sum payment typically required by contractors before beginning the work, as the funds from the lender would not be issued until the work is complete and a final inspection has been done.
Another thing to keep in mind is that your 5% down payment would be on the combined total of the purchase price of the home and the additional funds for renovations.
Purchase Price: $300,000
Renovation Funds: $30,000
The down payment required in this example would be $16,500, which is 5% of $330,000.
The last thing to be aware of is that if your renovation ends up being more than what was quoted, you do not have the option to receive additional funds to cover the extra. This must come from your own funds.
For example, if you were having windows replaced and it was discovered that the wall underneath the windows had rotted and this was not part of your original quote, you would be responsible for paying the difference between the quote that was submitted to the lender and the final cost of the renovation.
Using a Purchase Plus Improvements mortgage can be extremely beneficial to both the enjoyment of your home and the financial worth of your home, but it is important to strategize and make sure you fully understand the product and how to make it work best for you.
Mortgage Associate #220037262