When looking to qualify for a mortgage, typically a lender will want to review four main areas of your mortgage application. Income, credit, downpayment/equity, and the property itself.
So if you currently own a home, and are looking to upsize, downsize, take on a renovation challenge, or purchase a fixer-upper as an investment, it’s good to keep in mind that the condition of the property you are looking to finance matters. If the property you’re looking to purchase isn’t in good condition, it could be hard to arrange mortgage financing.
The property matters because the property you are looking to purchase is the collateral the lender holds in case you default on your mortgage.
You can expect that any lender will make every effort to ensure that any property they finance is without defect. Lenders want to see that a property is “prime and marketable”. In the rare case that you happen to default on your mortgage, they want to know that if they have to repossess, they can liquidate (sell-off) the property quickly and recoup their money.
So, to establish value, an appraisal is always required on every purchase. Now, if your mortgage is insured through an insurer like CMHC or Sagen, they will have used an automated system to appraise the property (you might not even have known an appraisal was done). For conventional mortgage applications, a physical appraisal; where an actual appraiser goes to the property, is required.
Now, what happens if you want to purchase a property that might not be in the greatest condition?
Well, you have options! This is where a purchase plus improvements can be a great mortgage option. A purchase plus improvements can allow you to purchase a property and include some of the cost of the renovations in the mortgage. It’s not as simple as just increasing the mortgage amount and then getting the work done, there is certainly a series of checks and balances, but it’s very doable. If you have any questions about financing your next property or potentially using a purchase plus improvements to buy a fixer-upper, please don’t hesitate to contact me anytime!