How to purchase a home and include the cost of renovations in the purchase!
How to use CMHC to assist you in buying the house of your dreams and build equity at the same time!
There is a little known program that you could be taking advantage of that can increase the chances of finding a home in this market where bidding wars are the norm and you don’t have the money to buy a “fixer upper”. With a great product out there you now have more flexibility to buy a house that you may have previously overlooked due to the fact the house is in need of some TLC. Whether it is a new kitchen, bathroom, windows, hardwood flooring, etc you have the flexibility to purchase a home and include the cost of renovations in the purchase. This program is ideal for first time buyers who typically have a smaller down payment and can’t afford to put money down on a house and pay for the renovations they desire.
CMHC (Canada Mortgage and Housing) is the government insurer that anyone with less than 20% down payment must pay in order to purchase a home in Canada. They have a program called Purchase Plus Improvements that allows qualified borrowers the ability to borrow up to 10% of the value to pay towards the costs of renovations. Let me give you an example: If the purchase price of a house is $500,000 the clients have the ability to borrow up to an additional $55,000 (10% of the purchase price plus 10%) in order to pay for the costs of renovations. This allows borrowers to not have to eat into their down payment in order to pay for the costs of renovating a home. With a lot of younger first time buyers trying to find creative ways to get into this increasingly expensive market, this allows you the flexibility of looking at homes that need a little TLC and allows you the ability to build some of your own equity by renovating the house. Why pay more for a house that someone else has renovated when you can include the renovation costs in your mortgage loan approval and renovate to make something your own dream home?
How it works is that borrowers must provide a quote from a contractor prior to the closing of the house, which is submitted off to the lender and insurer for approval. You must make sure you have a visit to the house prior to closing written in your purchase contract so that you can have a contractor review the work required and provide you with a quote that breaks down the scope of work and the costs associated with that work.
Once both CMHC and the lender have approved the improvement amounts, the amount is added into the mortgage and on the closing date the amount is advanced to the lawyer to hold onto until the renovations have been completed. That means you don’t get the money until the work has been completed so we recommend that our clients ensure that they have access to an unsecured line of credit available to them so the initial deposits/costs can be paid and work can begin. Once the work has been completed the lender sends an appraiser out to confirm that the scope of work that has been outlined on the quote has been completed and the lender authorizes the lawyer to release the money to you.
So what’s the catch? Borrowers cannot include the costs of appliances in the quotes as they are not part of the actual house and can be taken if you ever decide to sell. From our own experience, CMHC and lenders usually will not approve renovations to do things like add another unit to the property (like a basement apartment) or fix something like a furnace that should be in good working order when you buy the home. So keep that in mind when you are considering the options.
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Content written and provided by Jason Friesen of The Calum Ross Team