Many lenders receive calls and emails from Mortgage Brokers about the purchase plus improvements program this year as Alberta is leading the country on a national basis for the amount of money spent on home renovations.
Definition Purchase Plus Improvements : When a client is purchasing a home and wants to add cosmetic changes through a renovation process using funds advanced by the financial institution to complete and pay for the renovations.
How it Works: The client finds their dream home and enters a contract to purchase a home, but decides that part of the home (maybe the carpets or kitchen cabinets) need to be updated. Once the purchase contract is in place, the client needs to obtain quote(s) on the work to be completed. The quote(s) should be obtained from a reputable contractor or well known company and should be written professionally on a letterhead including labor and material costs in an itemized fashion. The clearer and easier to read the quote(s), the faster the financial institution can respond and approve the Mortgage. Once the quote(s) submitted are reviewed and approved the lender converts the “purchase file” to a “purchase plus improvements file” by adding specific conditions to mitigate the unique risks involved in this type of application. Somes financial Institutions will require the mortgage to be insured. Once the financial instutuion has approved the file and all conditions have been met, most lenders will advance the entire mortgage amount to the lawyers and condition for a holdback equivalent to the renovation cost.
Frequently Asked Questions (FAQ’s)
Q: What are cosmetic renovations?
A: Cosmetic renovations are usually smaller adjustments/ renovations to the home’s interior or exterior appearance. Examples would include: New Carpets, New Kitchen Cabinets, New Paint, New bathroom fixtures, etc.
An example of a larger but acceptable improvement would be: The addition of a detached Garage, or full basement development. These items are designed to add value to the home and not to correct deficiencies or structural concerns.
Lenders will not accept purchase + improvement for major renovations.
Q: What if the client wants to do the work themselves?
A: The lender will only compensate for materials cost(s) used to complete the improvements.
For Example: If You (the client) are very skilled and have a background or trade that would allow you to competently complete a small upgrade or renovation on your own; then most lenders would be comfortable allowing you to do the renovation yourself, but the financial instituion would morelikely not pay for any of your labor. The financial institution would still require a professionally completed and itemized material quote from Home Depot or Totem (reputable well known company) and would only compensate for these approved material costs.
Q: Can I use this program to purchase new appliances?
A: Chattel items such as Fridges, Stoves, Microwaves, Dishwashers, etc. cannot be included in this program. These items can be removed from the home upon sale and the financial institution cannot include them to directly impact a property’s value. In rare instances a custom built item can be included, but these items are rare and we cannot guarantee approval. In these rare cases you may speak directly to a Mortgage Broker/ Associate to get some clarification.
Q: Can the client make changes after the mortgage funds but before the holdback is released?
A: To avoid confusion and post funding issues, the financial institution requires that all work being undertaken is consistent and completed by the company who issued the quote. There may be times where clients can change their mind, and minor changes such as color alterations on a re-paint are acceptable, but larger changes cannot be approved. Once a mortgage is advanced the value is approved and based on the original quote(s) provided, therefore it becomes impossible to change them afterward. This is especially important for insured files.
Q: If you need an inspection report, who pays for it?
A: In most cases the financial institution will not pay for the inspection report.
Q: What documents are required to release the funds at the lawyer office?
A: Several documents are required upon completion to release the funds being held at the lawyer and they can vary from file to file. The most common ones are: A statutory declaration that the work is completed if the amount is under $10,000 along with an invoice(s) **OR** paid receipt from the contractor who completed the work. If the improvement is over $10,000 the lender require an inspection report completed by certified appraiser (including photos) along with an invoice(s) **OR** paid receipts. If you have paid the contractor directly or made a partial payment the bank will need to have documented proof so that you can be reimbursed for these funds. The financial institution, under most circumstances always direct the lawyer to pay the invoice directly, so if a paid receipt is provided the financial institution can issue a refunds to the client directly. Please note all documents are reviewed by the financial instituion prior to funds being released at the lawyer.
As always, thank you for support and please don’t hesitate to contact us with any specific questions.
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