With a housing market going down in Norwegian cities and a slowing growth in Canada, banks are becoming stricter everyday when it comes down to lend money. They want to stop bad credit and they all hope to be back in black next semester. Therefore, they don’t want to lend money if they are not 100% to see their money back. This may come to a problem for people who would like to renovate their property and they need financing.
Most people are stuck in a catch-22. They want to increase their mortgage in order to finance their renovation and the bank won’t do it unless the property shows a higher value than at the time of the first mortgage. However, in order to increase the property value, you must do the renovation and you won’t get the money first.
Therefore, several people will use their credit cards and will also apply for the “Home Depot pay-in-one-year-no-interest” credit cards. After two months, the renovations are done but their credit score is hurt since they maxed out all their credit cards and they requested new one. Keep in mind that the credit reporting agencies are not aware of your project; they only see an individual maxing out all their revolving credit and requesting for more. This sounds more like somebody that lost his job than someone renovating their kitchen!
So when you go back to the bank requesting more money to pay off your credit cards; this look like you are doing a consolidation instead of creating wealth within your property. Depending on your overall situation, this still may go through, but in all cases, your banker will ask you more questions than usual. If you had the bad luck of missing a payment because you were overloaded with the renovations, then your credit score will drop seriously.
Then what is the solution?
There is an easy solution to this problem and it is to play the system. In order to play it, you must understand it 😉 The key is to not start the renovation at all and go see your banker right away. Explain him the project and tell him how much your house should worth after renovations are completed. Ask him to submit the application with your new house value and as the renovation has been done already.
Therefore, the credit department will qualify your application according to your present situation but with the future value of the house. They will most likely approve your request but they are not dumb, they will request for an appraisal of your property as well.
However, your credit decision is usually good up to 6 months in a case of a mortgage. So you can now go and max out all your credit cards and do your renovations knowing that you will get the required amount through your mortgage at the end.
Once the renovations are completed, you ask your banker to request the appraisal, you get the new upgraded value of your property and you get your financing to pay off all your credit cards!
By doing your mortgage request this way, you will save a lot of questions, time and you will make sure you get approved in the first place.
Financial professional and online entrepreneur, I'm best known as The Financial Blogger. I want to make money because I like enjoying life the way it should be; with a lot of great food and wine! I also love to spend time with my lovely wife and 3 kids!
