# Purchase Plus Improvement Plans - CMHC - First Home



## rknigh2 (Jun 5, 2012)

My wife and I are shopping for our first home in Ontario. The area we would like to be in is generally older homes (70+ years). We have looked at a few homes with recent upgrades that we like (sort of) in our price range ($350-400k) but also toured some homes in the $240-280k range in the same area that, of course, need some significant work. We like the idea (theoretically) of purchasing a 250k home in the area we want and completing major renovations ($100-150k) to create a space we really love.

It would be great to put in $100k and automatically create some equity by increasing the value of the home - but ultimately that is not our goal - we just want to create the space we will love.

Can anyone share their experience with the "PPIP" and any suggestions to make the process easier for us? 

From what I understand (simplified steps):

1) Place an offer on the property with a condition we want a qualified general contractor to assess the costs of the improvements
2) Submit floor plans, improvements, and costs from GC to our lender
3) Lender assesses the improvements and decides the future value of the home
4) If $100k improvements improves the value of the home by $100k or more, we are approved for the purchase price + improvement costs


Thanks!


----------



## MRT (Apr 8, 2013)

I worked in mortgages for ~10 years with one of the big banks. The way we handled the Purchase w/Improvements was close to what you have listed. Whether or not CMHC is involved doesn't much change the process. 

You supply estimates for materials and labour, including plans if a major reno is being done. You are not bound to stick with those estimates if you are still shopping around. The lender will typically have an appraisal completed and the appraiser will provide an "as is" and "as improved" value based upon your intended work. The lender will then approve up to 80% financing based on the 'as improved' value. If you need more, obviously CMHC becomes involved.

The wrinkle in this program is that you typically have to finance the reno yourself, with the lender releasing the additional funds upon completion of the work. Once the work is done, the lender sends out an appraiser who confirms the work was completed as per the plans, and confirms the new value. The lender then releases the additional funds to you. There may be no holdback for very minor (e.g. <$10k) renos, but there almost certainly will be for very major projects. For a substantial reno they may agree to release funds at stages of completion (as they do if you are building your own home). 

* Keep in mind your down payment will be based upon the "as improved" value, not the contracted purchase price.

This is my experience from one major bank and each lender may have somewhat different guidelines, so definitely get the lender involved early to find out *exactly* what you need to provide to them, so that you can meet whatever deadlines you insert with your offer. 

CMHC info is here: http://www.cmhc.ca/en/hoficlincl/moloin/hopr/upload/CMHC_Improvement.pdf


----------



## rknigh2 (Jun 5, 2012)

Thanks MRT. That's very helpful.

Do you know if there is a set structure for the release of funds? We have saved a 20% down payment for our price range, but we certainly don't have enough to cover the costs of a down payment + major reno. Assuming the home + improvement is 400k (250 +150), is it possible to use CMHC to purchase with 5% down ($20k) and we then can use the remaining "down payment" ($60k) to begin the renovations? That only works of course if the banks allow some of the funds to be released as the work is completed (e.g. $50k as each floor in the house is renovated). I wouldn't want to get in a situation where we are half-way complete and the lender/bank says "not good enough, can't release funds".

I doubt there are many GC's that are willing to work with our situation. Meaning, any experience with GC's agreeing to complete work knowing the lender will release funds once the work is complete? Probably too risky in their eyes I imagine.


----------



## nobleea (Oct 11, 2013)

I did purchase plus on my first home, with CMHC and 5% down. It was a condo. Wasn't much for improvements. Maybe 10K. I believe due to the small amount, I only had to make a list of things I wanted to do. Then once done, send in the receipts and they released the rest of the funds. Everything else was as described.


----------



## Mortgage u/w (Feb 6, 2014)

Just as MRT, I too work for a lender as a Mortgage Underwriter and the steps listed above are similar to all lenders.

The main thing you need to understand is the holdback is only released once the work is completed 100% - this is something most clients have issues with. There is no progressive advance. Speak with your bank if they are willing to do a progressive advance. I know I've done this for some clients as an exception. I have authorized 2 releases where an inspection (paid by borrower) was performed each time....my criteria was that at each release, the home had to be in live-in condition. 

You can go with an insured mortgage (CMHC or other) and put only 5% down....this will free up some cash to give to your contractor to get started. Ask your contractor if he'll wait for the funds if you provide the proof of your mortgage.


----------



## MRT (Apr 8, 2013)

rknigh2 said:


> Thanks MRT. That's very helpful.
> 
> Do you know if there is a set structure for the release of funds? We have saved a 20% down payment for our price range, but we certainly don't have enough to cover the costs of a down payment + major reno. Assuming the home + improvement is 400k (250 +150), is it possible to use CMHC to purchase with 5% down ($20k) and we then can use the remaining "down payment" ($60k) to begin the renovations? That only works of course if the banks allow some of the funds to be released as the work is completed (e.g. $50k as each floor in the house is renovated). I wouldn't want to get in a situation where we are half-way complete and the lender/bank says "not good enough, can't release funds".
> 
> I doubt there are many GC's that are willing to work with our situation. Meaning, any experience with GC's agreeing to complete work knowing the lender will release funds once the work is complete? Probably too risky in their eyes I imagine.


Most contractors indeed do not like absorbing unnecessary risk regarding payment, or incurring the expense of floating costs until a job is 100% done, but many will accept a sizeable deposit, along with a firm mortgage approval, especially if they know funds will be released in stages. 

Given the inability to float the reno costs yourself, I agree your best bet may be to go through CMHC, and find a contractor who is ok with a deposit up front and the stages of release set by CMHC/lender. It is up to you to determine if you are better off putting 20% down on 350--400k home, or putting 5% down and using the balance of those funds to kickstart the reno on a 250k+150k scenario. 

There are general stages of completion for draws on a new construction; however, since every purchase+reno project will be somewhat unique, I am not sure how it would work with your particular plan. Typically there is a holdback of funds pending 100% completion, but since CMHC does insure multiple advance mortgages for reno scenarios, it is likely more a matter of finding a lender who offers this option too (i.e. just because CMHC offers a program, it doesn't mean all lenders offer it).

My best suggestion is to find an experienced broker who is familiar with the purchase w/improvements program and with multiple-advance mortgages, who could advise you of the lenders they know who are best equipped to work with your scenario. Also ensure that your real estate agent is aware of the potentially extended timelines to get such an approval. A standard 5-day financing condition *may* not cut it, unless you can get a contractor in there on day one who will have a report to you within a day or two, leaving a couple of days for lender and CMHC approval. Also let your lawyer know there will be multiple advances.

It would take an exceptional circumstance for them to recant or adjust the approval later in the process. If the lender/CMHC approves the scenario, and the work is done in general accordance with the plans and estimates provided, they will release funds upon confirmed completion. Any significant changes to work, materials, etc. should be disclosed ASAP to ensure it won't affect end-value, but they don't expect you to adhere 100% to the estimates provided. 

To be honest, these scenarios are a pain the butt for everyone involved...but the potential reward of having the home that you want can be well worth it. The smoothness of the process is ultimately dependant upon how prepared the client, lender and contractor are throughout.


----------



## MRT (Apr 8, 2013)

nobleea said:


> I did purchase plus on my first home, with CMHC and 5% down. It was a condo. Wasn't much for improvements. Maybe 10K. I believe due to the small amount, I only had to make a list of things I wanted to do. Then once done, send in the receipts and they released the rest of the funds. Everything else was as described.


That sounds right. For anything under 10k, we typically just required estimates for materials/labour in order to approve the higher mortgage amount, and released funds all mortgage funds on the closing date, leaving it up to the client to get the work done. Anything beyond 10k or so resulted in a holdback of the additional funds until the work was confirmed complete via an appraisal.


----------

