The Hidden GEM for First Time Home buyers
Home plus improvements has been around for more than a decade now but in my opinion, it is the most underutilized product in the mortgage industry today.
With the government rules changes regarding the stress test and not insuring properties over a million this product seems to have faded away. That said I believe it to be the hidden Gem for first time home buyers or people who are purchasing a home for less than $1,000,000.
Most first-time home buyer move into their new home and start by making changes right away, they like most of us want their property to reflect who they are, they have pride of ownership, and they want to start by making improvements that won’t take thousands of your dollars in one shot.
It could be painting, flooring, new energy efficient windows, new roof, and even new heating system for examples. Traditionally they would start the process using what funds they have left over from their savings at time of purchase but more often than not they use their credit facilities such as credit cards or lines of credit to fund the projects.
From my experience this tends to happen in the first three years, at which time the customer becomes trapped into high interest rate debt, credit cards can run upwards of 29% this really effects their cash flow, and they find carry all the debt to be challenging and, in some cases, impossible. It’s at that time they look to refinance with their lender, be it a bank, trust company, mono line lender, credit union or their mortgage broker.
If that not possible they look for a second mortgage. Sometimes if it’s bad enough they will seek credit counseling or have to list their home for sale.
So, it’s time for the hidden gem the diamond in the rough.
At the time of the mortgage application with their mortgage broker the mortgage broker can apply with the big banks, Credit Union, Mono line lender trust company for a home plus improvement loan which means that the cost of the renovations can be included with the mortgage application. Therefore, the cost to fund the home improvement would be at the same interest rate as their mortgage which is far less than a credit card or line of credit and it can be amortised over 25 years making the cost of the project far more affordable.
When this project was introduced, the maximum loan would be for $40,000 or 10% of the purchase price there are now exception and can be dealt with on a case-by-case bases. Here is how I approach it with my clients, when you’re looking for homes, you need to be aware of what improvements you would like to consider, or this example let’s talk about possible a kitchen renovation or bathroom renovation.
So, you’re now out looking at homes and you see a potential home you’re interested in you would then take some pictures and head to local supplier in this case let’s say Rona and ask to get a quote for the new kitchen or bathroom. Now that you have the quote you can put an offer in on the home you would like to purchase. I would recommend that your offer is conditional on financing, this gives you the protection needed to know if you will get the additional funds required for the home improvements.
If your offer is accepted let’s say for $550,000, we would now send to lender and we would ad in the cost of improvement as well in this case we would say $35,000. So, the purchase price would be $550,000 + 35,000= 585,000. Now you would need to have the require 5% down of the total purchase price $29250.00. So, the loan we would be applying for would be 555,750.00. The lender would in turn forward the file to one of the three Insurance companies CMHC, Sagen or Canadian Guarantee. Once the insurance company received the file, they will do an internal appraisal to see if the purchase price plus the proposed improvements equals the new valve in the case $585,000 If it does then the loan is approved.
It is important to understand that not all home renos with increase the valve of the home dollar for dollar. Bathrooms, kitchens, and furnaces seem to add the greatest valve. Things like painting, landscaping, flooring add valve but not always for the full cost so the loan would be adjusted. However, any funds made available will help with renos.
When it comes time to close the lender will forward the funds to your lawyer for closing, you will of course bring in the balance of your down payments and legal fees. The funds require to pay the vendor will be advanced and the title will change into your name. The money to pay for the renovations will be left in the lawyer trust account until such time the work is completed. This stands to reason as the increase valve in your home will not take place until the work is completed.
Typically, you’re looking to complete the renovations is 120 days. Once the work is completed, we must send an inspector in to confirm the work was completed and once that take place and the lender receives conformation your funds are released from the lawyer’s trust account and given to you.