So you’ve found a home that you’re almost in love with but it just needs a little help to get it to the finish line. A lot of the time, a common concern is where the money will come from to be able to afford the updates that you want to do. That’s where a purchase-plus-improvements mortgage would come into play. Simply put, a purchase-plus-improvements mortgage incorporates money for renovations within the mortgage for the purchase price of your home. This allows you to take on updates and finance it into your overall mortgage.
How Does It Work?
When you go through the pre-approval process, you will be given a dollar figure that is your max budget. This is what you can spend to purchase a home, including your down payment. For example, let’s say you are approved for $600,000 as your maximum threshold. And, while house shopping you come across a home listed for $525,000. This home has great bones but needs a new roof, windows and some cosmetic upgrades. Since it is below your budget, you could opt to do a purchase-plus-improvements mortgage to fund the new roof, updates, etc.
It’s important to note that the amount of your pre-approval is the overall amount that you can spend for both the purchase of the home and improvements. In this scenario, you are approved for $600,000 so your all-in budget for buying the home and the updates would not be able to exceed that amount.
When using a purchase-plus-improvements mortgage, you will need to supply an official quote from a contract to the lender for review and approval. From there, they will essentially approve, amend or deny your request. The underwriting department is looking for things that will deliver a return on investment. A good rule of thumb is to use this type of mortgage to bring added value to your home.
Here are a few examples of things that could potentially be addressed:
- Having a new roof installed
- Waterproofing or dealing with foundation cracks
- Addressing structural issues
- Having energy-efficient windows and doors installed
- Converting a home from propane or oil heat to natural gas
- Installing HVAC and upgrading to forced-air heating/cooling vs. baseboard heating
- Addressing electrical issues including having old wiring removed and/or a new panel installed
- Adding additional square footage
- Finishing a basement to provide additional living space
- Modernizing the cosmetic appearance of the home and its appliances
Pros of a Purchase-Plus-Improvements
A purchase-plus-improvements mortgage is great for anyone who may wish to update their house but can’t come up with the money via alternative means. Most importantly, it helps many buyers come up with the funds to address any concerns that they may have with the property without needing to take time to save. This mortgage variation also gives helps you to look at homes with an open mind and be able to see the potential in them.
Another positive, especially for first-time homebuyers, is that this additional money will be incorporated into your mortgage payment. Because the money is blended into your mortgage, you don’t have to worry about two different payments comings out of your account. That’s often a huge plus for someone who is carrying the costs of a home for the first time.
Cons of a Purchase-Plus-Improvements
Unlike a traditional line of credit, this loan is blended in with your mortgage. This means that you will be paying for it over the term and amortization period of your mortgage. It’s important to weigh the costs of the interest vs. the amount of ROI to determine if this is the right fit for you.
Furthermore, the mortgage company reserves the right to inspect the project before releasing the funds. This means that until agreed-upon milestones are hit, you may need to float some of the upfront costs. An example of this upfront expense would be your contractor’s deposit. With that being said, lenders are all different. If you’re looking at using this type of mortgage, have an in-depth discussion with your lender about your requirements.
If you’re in the market for a fixer-upper, we can help. We’ll ensure that you have competitive market comps and are put in touch with a lender who can answer all of your questions. Let’s talk.