The pandemic has created conditions that have led many to look for renovation work, and as refinances dry up and credit becomes harder to come by, lenders are leaning on the trend.
While home renovation loan products have been around for decades, some mortgage lenders have recently stepped up their efforts with these products and created specific new roles or teams to realize their potential. In an increasingly competitive housing market, home improvement options can win back and attract new customers, and while they won't solve the most pressing housing problems in the current environment, renovations can also offer antidotes to alleviate them.
“If you look at the amount of home equity being built in America, this is probably the greatest equity that consumers have ever raised in lending history. So we felt that this was another avenue, another channel for us to actually help consumers, "said Bill Dallas, president of Finance of America Mortgage, which will start in 2021 after acquiring Renovate America & # 39; s Assets introduced a separate branch for housing construction.
Other lenders, including Homespire Mortgage, NFM Lending, and Diamond Residential Mortgage, have also taken out more home renovation loans this year, in part to streamline the operation of existing products such as those offered by Fannie Mae and Freddie Mac – 203K loans that it gives borrowers allows a home renovation loan to be added to a traditional purchase or refinance mortgage application.
Newer offerings, like Freddie Mac's leaner version of its home renovation mortgage for lower cost projects, launched in 2021. And while Finance of America has long had the 203K and home renovation products in its commercial business, Finance of America was building its new platform to focus on, a standalone product for home borrowers.
Companies are responding to a resilient market where home improvement spending increased in 2020. Some see the home renovation loans as an opportunity for a new group of borrowers trying to buy their own home in a market with limited supply but increased competition.
“If you're in a driving market where consumers buy homes for $ 300,000, there may be a multitude of three properties. Well, if there's a $ 200,000 home and you want to invest 100 grand to renovate, that opens up your realm of possibilities, ”said Listy Limon, vice president of National Production.at Homespire Mortgage.
“Home improvement products – if people are good at it and really knowledgeable about them – is something that helps,” she said.
But “doing it well” is not an easy task when only a handful of such products are generally available. In addition to those of the FHA, Fannie Mae, and Freddie Mac, the Department of Veterans Affairs offers a similar product. The terms of such loans can be challenging for both lenders and borrowers, which has resulted in lenders making increased efforts to market and educate them.
“Often times we found that the real estate agents really didn't understand the product or knew a lot about the product, and they'd hear about builders and renovations and they all kind of walked away,” Limon said.
Homespire has a team of five currently focused on home renovation loans, including specialist and writer David Lewis, who was appointed as the national home renovation loan manager earlier this year to oversee the growth of the program and train loan officers and staff.
"It takes a lot of experience and expertise to understand the moving parts involved in timely processing, drawing and handling these loans," said Lewis. "Most loan officers don't see this volume, at least in their personal pipeline, as constant enough compared to regular refinancing or purchase transactions to really understand the depth they need for a smooth transaction."
The current state of US housing construction indicates the growing need for redevelopment. According to researchers at Freddie Mac, almost 80% of the country's homes were at least 20 years old in 2019, with the highest proportions of older homes in California, the Midwest, the Mid Atlantic, and the Northeast. In some states, the median household age is between 40 and 60 years.
“Everything comes from old houses. They are now using systems that are 50 years old, ”said Dallas of what sparked interest in Finance of America's home improvement platform.
The age of the US housing stock was made clear to many by the COVID-19 pandemic when homeowners suddenly had to adapt to modern technology to get their job done or go to school.
“The desire to use your home several times now creates demand for the systems. And that creates demand for 'I have to do something,' ”Dallas said.
The pandemic also prompted people to reevaluate their relationships with their habitats and made the need for upgrades clear.
"Another market factor driving renovation refinancing is really how COVID taught or forced us to live at home with education, work from home, exercise from home, and stay home", said Lewis. "People see their rooms in a completely different light."
With the pandemic came an unexpected spike in property values that suddenly made more capital available to homeowners to make the upgrades they might need or want. It also enabled homeowners to create a type of home that was considered unreachable in a hot housing market where multiple bids for a single apartment are not uncommon, according to Lewis.
Unless they decide to build a new home, buyers are unlikely to end up with a home with every item on their wish list. Many often do a side move instead and then find out they can take out a home renovation loan to get some of the amenities they want, Lewis said.
"The nice thing about a home renovation loan is that we can access the Forward equity due to renovations, but we now access it before it is actually built."
While most lenders develop their home renovation loan units to market government loans in conjunction with buying and refinancing mortgages, Finance of America was able to adopt a different strategy for its home improvement store after acquiring Benji, formerly Renovate America's platform.
“Here I think the advantage came to us. It's a very different route from what I would call customer acquisition, ”said Dallas.
While the company designed Benji with the idea that its loans would lead to security-related and other upgrades for homeowners, Dallas said a sizable number – around 25-30% so far – has been raised to help deal with the effects of a crisis or other. a “catastrophic” event, such as a fire or a power outage. And, unlike government products, loans raised through Benji can be used by investors to finance renovations of rental housing or other non-primary residential buildings, helping to increase the number of affordable housing and potentially alleviating housing shortages.
The benefits of home renovation loans in creating more affordable housing have not gone unnoticed by Lewis or those advocating low- to middle-income borrowers. In addition to the positive aspects associated with building finance loans in the supply of housing, the products can and should also play a greater role in revitalizing neighborhoods and cities and triggering additional development.
“It's good for the communities,” he says. "That older downtown home that's suddenly the jewel of the block, the community's reinvestment, a good tax payment in town hall for something that may have been abandoned or run down, helps all round," he said.