How To Add Home Improvements To Your Mortgage In 4 Easy Steps

If you are able to find the perfect home that has everything on your list, is completely up to date, and is 100% move in ready, consider yourself very lucky! For most people, the perfect home for them sometimes needs a little TLC to make it just right. Perhaps the backyard isn’t complete or fenced in, or the basement has a lot of space, but it’s just a slab of concrete. It could be that the wiring in the home or the plumbing is up to code, but not necessarily up to date.

how to add home improvements to your mortgage

When you’ve found the ideal home but it needs repairs, how can you get the money to pay for them? There are a few ways:

  • Using a line of credit you already have
  • Paying cash up front/dipping into your savings account
  • Using a home renovation loan

What Is a Home Renovation Loan?

Generally, a home renovation loan is any loan that is designed to help you pay for home improvements. There are several different types of home renovation loans. All of these loans are provided in consideration of a home’s equity – its value minus the amount still owed. Loans that allow you to add home improvements to your mortgage are available, but many home buyers do not understand how they work.

With a qualifying down payment, some banks will allow you to finance home improvements when you purchase a new home. For the most qualified buyers, banks may offer to lend up to 95% of the value of the home after renovations.

This is good news for many home buyers. For one thing, the ability to add home improvements to a mortgage means that you can buy an older home that needs a lot of work, and not have to pay for those improvements up front. And for some people, that also opens up more possibilities for potential homes.

You might think that the process to add home improvements to your mortgage is complicated, but it’s really not. Your lender and your real estate agent will be there to guide you every step of the way. Here are the four steps at a high level.

How to Add Home Improvements To Your Mortgage

Step 1. Determine which improvements to include.

When you walk through the house you want to buy, make sure you consider all of the home improvements you want to make. Create a list of them, and discuss them with your real estate agent. You can only include permanent improvements in a home loan (improvements that will stay with the house).

Consider improvements that will really add a lot of value to your home. For example, you may be able to be finance a basement project – finishing or a completing a basement space. The reason is that it will increase the amount of livable space in the home, which in turn adds significant value.

Step 2. Get quotes for the work you want to do.

Meet with contractors and service providers as soon as possible, and have them provide quotes for the work you intend to finance. This is a good time to shop around, because the cost of the improvement is a major factor in the mortgage approval. Because of that, you should communicate with your real estate agent and ask them for referrals. In these cases, you should choose a contractor who’s trusted and comes with many referrals.

Once you have the quotes, decide whether or not they will add value to the home and how much. Then, decide if you want to finance those improvements as part of the mortgage. You have other options when it comes to financing, it’s just that sometimes, it makes sense to include the improvements in the mortgage (especially if the interest rate is lower than other financing methods).

Step 3. Complete the mortgage approval process.

You submit the quotes for the improvements along with the rest of the loan application. The request for the additional money has to be made at that time; otherwise, you’ll have to submit a new application.

Important: Make sure that your offer has a financing contingency. This will protect you if your mortgage application is denied due to the improvement quotes. If you don’t have a financing contingency, you will be legally committed to buying the house, with or without any additional money for improvements.

A financing contingency simply states that your offer to buy the house is contingent upon financing, and if you are not able to secure financing you will be able to walk away from the sale.

It can typically take up to 5 days to complete the financing approval, but be prepared for it to take longer when renovation estimates are part of it.

Step 4. Complete the improvements and have the home appraised.

Banks will not pay for the entire cost of the improvement upfront. Instead, you’ll give your contractor or tradesman a down payment. Then, the work will begin.

Once the work is complete, the bank will send someone to appraise the house and inspect the finished work. Then, if everything goes as planned, the bank will pay the balance due on the improvements.

Though simplified, those are the four steps to add home improvements to your mortgage. Keep in close communication with your lender and agent, because every situation is different.

Additional Tips:

  • Complete a pre-approval with a mortgage lender. Jennifer Lloyd, a local mortgage specialist and friend of mine, recommends getting a pre-approval before putting in your offer. This way, you’ll be better prepared and will be able to ask your lender important questions about the renovation financing process.
  • Find out about home improvement rebates. Last month, I wrote a post on the new Alberta Home Improvement Rebates program. Make sure you look into that, as the cost of making improvements to your new home may be much less than you think, depending on what you’re trying to do.
  • Utilize your real estate agent. Your agent has a wealth of knowledge about the market. Be open about what it is you really want, whether it’s a certain location, a finished basement, a fenced in yard, etc. Together, you can look at a number of different ways to get into the house of your dreams, maximize value, and minimize cost.

If this is your first visit to my blog, welcome! My name is Jennifer McIntosh and I am a real estate agent here in Calgary. If you’re considering buying a new home, I’d love to meet with you. You can contact me at (403) 998-5535 or send me a message.

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