On the promise to purchase forms : how to provide for the financing of renovations or taxes

Financing of renovations

As soon as they return from their honeymoon, Mrs. Rhonda Higgins and Mr. Osvaldo Heredia visit 17 houses in less than a month with their broker, Aimée Detousse. Mrs. Higgins and Mr. Heredia are bound by a mortgage brokerage contract (MBC) to mortgage broker Karina Tarinova.

The young couple ends up choosing a house on des Tourtereaux Street, sold by an estate and requiring extensive renovations. But this does not scare them, because they are well supported by their families, several members of which work in the construction industry.

They ask their broker, Aimée Detousse, to draft a promise to purchase and to present it very quickly to the seller’s broker, Georges Roche. They decide to offer the full price asked by the estate, which is $160,000, with 10% down payment, calculated on the price and on the additional amount of $40,000 they want for renovations. If they can’t get the down payment for the renovations, they won’t buy the house.

Broker Detousse is a bit at a loss: how can she link section 5 with clause 6.1 of the Promise to purchase (PP)?

Her agency executive officer being out of town for an important meeting, she turns to the Info OACIQ Centre. The information agent explains to her how to proceed.

She must:

• break down the purchase price (specified in clause 4.1) under section 5 “Method of payment”;
• apply for financing including the cost of renovations under clause 6.1;
• explain clearly under clause 12.1 the reason why the financing applied for is higher than the total price indicated in 4.1 and in section 5.

Under clause 6.1 of the PP, broker Detousse will indicate a loan amount of $180,000¹, broken down as follows:

$160,000 (offering price)
+ $40,000 (renovations)
– $20,000 (10% down payment, renovations included, because it is important to remember that this element cannot be 100% financed)

Finally, under clause 12.1, the broker will write:

“The loan amount applied for in clause 6.1 is greater than the purchase price and differs from the amount indicated in clause
5.3 because the buyers wish to finance and carry out renovations in the amount of $40,000.”

Then, the OACIQ information agent reassures broker Detousse regarding the apparent contradiction between the fact that clause 5.3 indicates $140,000 whereas clause 6.1 shows $180,000. The amount for the purchase will be sent to the acting notary by the financial institution, whereas the amount for the renovations, if accepted, will be paid directly to the buyers by the notary or the financial institution.

Financing of taxes
There is another case where the above “recipe” applies: the case of a buyer who wants his loan to cover the taxes (GST and QST) applicable to his purchase.

Let us take the example of a triplex with a convenience store on the ground floor, for which the buyer’s PP was accepted for
$450,000. The seller has obtained confirmation from his accountant that the one third, or $150,000, of the selling price of the immovable is taxable, which brings the total cost for the buyer to $472,462.50. The buyer, who will occupy a dwelling on the upper floor, will make a down payment of 10% and can apply for the loan to cover the taxes (don’t forget that the loan cannot cover 100% of the taxes and the buyer must include the same portion, i.e. 10%, in his down payment).

Finally, under clause 12.1, the broker will write:

“The loan amount applied for in clause 6.1 is greater than the new hypothecary loan indicated in clause 5.3 because the buyer wishes to add the amount of applicable taxes to his loan. The price stipulated in clause 4.1 and section 5 excludes taxes.”

¹ For the purpose of this text, the loan insurance premium is not taken into consideration. However it goes without saying that in accordance with her MBC, mortgage broker Karina Tarinova will agree to obtain for Mrs. Higgins and Mr. Heredia a loan that includes the applicable loan insurance premium based on the type of file.
² For the purpose of this text, the loan insurance premium is not taken into consideration.