How to finance home improvements
Yeah, but the house needs some work...
A common objection when a buyer prospect is looking at purchasing a home is that the property needs some sort of improvement, such as new carpets, new windows, new fence, new roof, garage, etc.Solution
A number of mortgage lenders participate in a program called Purchase + Improvements, which means qualified home buyers can get reimbursement for pre-approved renovations made to their new home, which need to be completed immediately after taking possession of the purchased property. All this can be done with one mortgage and with as little as 5% down.
Key
The improvements must increase the value of the property. Mortgage loan is based on the As-Improved Value of the home, not the cost of the renovation, so certain improvements may be better than others, such as kitchen or bath vs new fence. The improvement funds are NOT (typically) advanced until after the work is complete and inspected, hence the buyer must arrange trade credit or have access to funds. Improvements must (typically) be completed within 90 days.
Two Scenarios
Cost of improvements are less than 10% of the purchase price to max of $40K, in which case the improvement funds are advanced to the lawyer and to be released upon completion of the project. (Minor Improvements) Cost of improvements are greater than 10% of the purchase price, in which case the improvement funds are advanced to the lawyer in stages based on percentage complete. (Major Improvements)
Example – Minor Improvements
- Accepted Offer @ $400,000, buyer is providing 5% down
- New kitchen quote = $30,000 (written quote and specs must be obtained sometime between accepted offer and financing condition (COF) deadline)
- Appraiser is called in before COF and appraises home “as-is” (say $405K) and “as-improved” per quote (say $440K). Lending is always based on lesser of appraised or offer, so max lending value is $430K
- At 95% loan-to-value, maximum loan is $408.5K and required down payment is $21.5K
- At closing, lawyer is authorized to release 95% of $400K ($380k) to the seller and $20K of the buyer’s down payment, yielding $400K at closing for seller. Lawyer retains in trust $30K, being balance of mortgage and down payment funds.
- Upon firm sale, Buyer can contract for the kitchen work to commence upon possession.
- Regardless of whether the kitchen comes in over budget or under budget or perhaps even a different contractor is used, as long as the work is completed to the original spec as confirmed by the Appraiser, $30K is available for release by the lawyer.
