A "purchase plus improvements" mortgage is a type of mortgage loan that allows you to finance both the purchase of a home and the cost of improvements or renovations to that home in a single mortgage. This can be a beneficial option if you're buying a property that needs some work but you don't have the cash on hand to cover both the down payment and the renovation costs separately.
Here's how a purchase plus improvements mortgage typically works:
1. Purchase a Home: You start by finding a home that you want to buy. This could be a fixer-upper or a property that needs some upgrades. The home must be habitable with running water, heat and power.
2. Get Cost Estimates: Before applying for the mortgage, you'll need to obtain detailed cost estimates for the improvements or renovations you plan to make to the property. These estimates are typically provided by contractors or other qualified professionals. Provide these to your mortgage broker.
3. Apply for the Mortgage: You apply for a mortgage that covers both the purchase price of the home and the estimated cost of improvements. The broker and lender will review your creditworthiness, income, and other financial factors to determine if you qualify for the loan.
4. Appraisal: The lender will order an appraisal of the property to determine its current value and ensure that the proposed improvements are reasonable and will increase the value of the home.
5. Mortgage Approval: If your application is approved and the appraisal supports the financing of improvements, you'll be approved for a mortgage amount that includes the purchase price of the home and the renovation costs.
6. Funds Held in Escrow: The funds for the renovation or improvement portion of the mortgage are typically held in escrow by the lender. This means the lender will keep the money and release it to you or your contractor as the work is completed and verified. It is important to inform the contractor that they will be paid when all the work is 100% completed.
7. Renovations: Once you have the keys to the home, you can begin the renovation work. It's essential to stick to the planned improvements and ensure that they meet the lender's guidelines and local building codes.
8. Inspections and Disbursements: Depending on the scope of work, the lender may send inspectors to verify that the renovations are progressing as planned. Once the work is completed, the lender will release the funds from the escrow account to cover the renovation costs.
9. Repayment: You will make regular mortgage payments based on the total amount of the mortgage, including both the purchase price and the renovation costs. The interest rate and terms of the loan will be agreed upon during the mortgage application process.
It's important to note that the specific requirements and procedures for a purchase plus improvements mortgage may vary by lender and location. Additionally, not all lenders offer this type of mortgage, your mortgage broker will assist yoyu in sourcing the best options for purchase plus improvements.
Tonia Mercer | The Mortgage Missus Inc.
About the author,
Tonia Mercer is an independent mortgage broker. She has been in the industry for 15 years and in 2021 she launched her own brokerage The Mortgage Missus Inc.
Tonia is passionate about financial education and believes that working with independent experts is the best way to get unbiased, professional advice. She has joined forces with local independent home and auto, financial advisor, legal, appraiser and real estate service providers.Effectively creating a concierge service for all things financial and real estate.
Tonia donates a portion of all mortgage revenue to Mercer's Mission, a street dog and cat feeding mission in the Dominican Republic. https://www.facebook.com/mercersmission
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