You found your dream condo or home but it’s missing the fully renovated kitchen and hardwood flooring you’ve been dreaming of? But you used all of your savings for the down payment. What are you going to do now? Don’t panic! Read on to find out what your options are – but be sure to consult an experienced mortgage broker to work through the process for you.
How does it work?
You can purchase a property and add the costs of the improvements to the mortgage amount. Anywhere from 10% -20% of the purchase price depending on lender and insurer approval. Suggested maximum of $40,000 but we have seen exceptions. The total mortgage can be uninsured. Larger projects & draws are possible under a progress advance program.
An appraisal may be required (at clients cost) to confirm the value of the property including the improvements. The lender will base the total financing on the “as improved” value of the home. As such your down payment must always reflect a percentage of the “as improved” value. This can cause confusion at closings so most of all use an experienced mortgage broker.
The lender requires quotes for the work to be done, and an estimated time frame for completion of the renovation. Purchase Plus amount would be held back on closing. You would have to make up any shortfall to close your purchase and pay the trades yourself or make arrangements when the payments are due.
Finding Trades to Do the Work
Some trades may be helpful. If you are short cash for the renovations you could advise any trade up front that the full amount of the cost estimate is coming from mortgage financing and that it cannot be advanced until the renovations are 100% complete. Some trades/contractors with a decent track record will take a 15-25% deposit and get paid the balance upon completion. This would further reduce your up front out of pocket expenses.
Once the work is done an inspection is usually required (also at client cost). If the renovations are 100% complete the holdback funds would be released. Beware of substitutions, bargain bin green shag carpet, plywood cupboards replacing cherry wood, that sort of thing. You want to ensure you get the quality being paid for. The lawyer could direct that the holdback be released or partially released to the contractor.
If you start the renovation work prior to possession you must be careful not to jeopardize the mortgage approval. It may change your credit rating or ratios resulting in the lender cancelling the mortgage. The lender may pull your credit report anytime up to and including possession date. All the work has to be 100% complete before the holdback funds can be released, partial payments cannot be made. Exceptions are possible.
Mortgage breakdown Example:
Purchase Price: $350,000
Improvements / Holdback $20,000
Total Value: $370,000
Down Payment 5% $18,500
Mortgage Amount: $351,500
CMHC Fee (4%) $14,060
Total Mortgage: $365,560
Working closely with your Realtor and mortgage broker from the onset is best. Your Realtor can let you know if desired improvements will increase the value of the property. The mortgage broker will ensure all details on the financing side are arranged for you. Your mortgage broker will need to ensure that all standard paperwork requirements are also in place. This includes (but is not limited to) proof of employment, income verification, percentage of debt servicing, proof of down payment, investment income, NOA’s. Plus there is the copy of the offer, MLS sheet, appraisal, proof of ID, lawyer contact info.
Putting the leg work in will all be worth it. Before you know it you will be hosting your friends and family in your newly renovated kitchen, or parking in your new garage. Just like you dreamed of!
Richard Bergeron, Associate Broker – RE/MAX Realty Professionals
Calgary Realtor with 30 years of real estate experience
- Specializing in Condominiums, Luxury Condominiums and Homes in Calgary
- Offering clients a solution-oriented, collaborative approach to Real Estate
- CCS – Certified Condominium Specialist
- CNE – Certified Negotiation Expert
- Member of the Canadian Condominium Institute
- FRI – Fellow of the Real Estate Institute of Canada
- Awarded the Calgary Real Estate Board’s MLS Million Dollar Club award 23 times, prior to the awards retirement
- Annual recipient of the RE/MAX Chairman’s Club award as well as Circle of Legends lifetime achievement award
- Consistently in the top 2% of Realtors in Calgary for sales volume and number of transactions
- Author of numerous published articles in The Calgary Real Estate News, The Condo Guide and The Calgary Herald
- Active member for over 15 years on several local condominium association boards, including holding the positions of President and Vice President
- Consistently in the top 10 teams at RE/MAX Realty Professionals – Calgary’s highest producing office
- Editor of the RE/MAX Western Canada Annual Condo Report
- Guest speaker at the RE/MAX Western Canada Convention
- The Real Estate Show Guest speaker