The pandemic has created conditions that have led many to seek home renovations, and as refinances dry up and purchase loans are harder to come by, lenders are leaning on the trend.
While home improvement loan products have been around for decades, some mortgage banks have recently stepped up their efforts with these products, creating new specific roles or teams to harness their potential. In an increasingly competitive housing market, home improvement options can win back customers and attract new ones, and while they do not solve the most pressing housing issues in today’s environment, renovations can. also provide antidotes to relieve them.
“If you look at the amount of equity in a home built in America, it is probably the largest amount of equity consumers have ever accumulated in credit history. So our point of view was that this was another avenue, another channel for us to actually help the consumer, ”said Bill Dallas, president of Finance of America Mortgage, which introduced its own. home improvement vertical in 2021 following its acquisition of the assets of Renovate America.
Other lenders, including Homespire mortgage, NFM Lending and Diamond Residential Mortgage, also expanded further into home improvement loans this year, in part to streamline the operations of existing products, such as those offered by Fannie Mae and Freddie Mac, in addition to the long-standing loan from 203K from the Federal Housing Administration, which allows borrowers to add a home improvement loan to a traditional mortgage purchase or refinance application.
Newer offerings, such as the thinner Freddie Mac version of his renovation mortgage for low-cost projects rolled out in 2021. And if it has been offering 203K and renovation products for a long time in its commercial activity, America’s Finance built its new platform to focus on a standalone product for residential borrowers.
Companies respond to a robust market who saw Increase in home renovation spending in 2020. Some see home improvement loans as providing opportunities for a new set of borrowers trying to access homeownership in a market with limited supply but increased competition.
“When you’re in a dynamic market where consumers are buying qualifying homes for $ 300,000, there might be a bevy of three properties. Well, if there is a $ 200,000 house and they want to invest $ 100,000 for the renovation, that opens up their possibilities, ”said Listy Limon, vice president of national production at Homespire. Mortgage.
“Home improvement products – when people do it right and really know it – it’s something that helps,” she said.
But “doing it right” is no easy task when only a handful of these products are commonly available. In addition to those from the FHA, Fannie Mae and Freddie Mac, the Department of Veterans Affairs offers a similar product. The terms of these loans can be difficult for both those who take them out and those who take them out, leading lenders to make a more concerted effort to market them and provide education about them.
“A lot of times we’ve found that realtors don’t really understand or know much about the product, and they hear about contractors and remodeling, and everyone kind of runs away,” Limon said. .
Homespire has a five-person team currently focused on home improvement loans which includes specialist and author David Lewis, who was selected as the national home improvement 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 elements associated with processing, underwriting and closing these loans in a timely manner,” Lewis said. “Most loan officers – they don’t see this volume consistently enough, at least in their own personal pipelines versus regular refinance or purchase transactions to really understand it to the depth they need for a smooth transaction. “
The current state of housing in the United States indicates a growing need for renovations. Almost 80% of homes nationwide were 20 years old or older in 2019, according to researchers at Freddie Mac, with the highest percentage of older homes in California, the Midwest, Mid-Atlantic, and the Northeast. In some states, the median age of homes is between 40 and 60 years old.
“Everything comes from aging housing. You’re now using 50-year-old systems, ”Dallas said of what sparked interest in Finance of America’s home improvement platform.
The age of the US housing stock has been highlighted for many by the COVID-19 pandemic, when homeowners suddenly had to adapt and adapt to modern technology to do their jobs or attend school.
“The desire to now use your home for multiple uses creates a demand on the systems. And that creates a demand on ‘I have to do something,’ ”Dallas said.
The pandemic has also caused people to re-evaluate their relationships with their living spaces and highlighted the need for upgrades.
“Another market factor driving home improvement refinancing is really how COVID taught us or forced us to live with home education, work from home, home fitness, vacation home, ”Lewis said. “People see their spaces in a very different light. “
An unexpected surge in property values has come with the pandemic, suddenly providing homeowners with increased capital to make any upgrades they might need or desire. It also allowed homeowners to create a type of home considered out of reach in a booming housing market, where multiple offers on a single residence are not uncommon, according to Lewis.
Buyers are unlikely to land a home with all the items on their wish list unless they go for new construction. Many, instead, often make a sideways move and then find they can take out a home improvement loan to get some of the amenities they want, Lewis said.
“The beauty of a home improvement loan is that we can access term equity based on the renovations, but we are accessing it now before it’s actually built. “
While most lenders are expanding their home improvement loan units to market government loans taken in conjunction with the purchase and refinancing of mortgages, Finance of America may have taken a different strategy for its home improvement vertical after acquiring Benji, the former Renovate America platform.
“This is where I think the advantage came for us. It’s a whole different avenue of what I would say would be customer acquisition, ”Dallas said.
While the company designed Benji with the belief that his loans would lead to safety and other improvements for homeowners, Dallas said a significant number – around 25-30% so far – had been taken to deal with the effects of a crisis or other “catastrophic event, such as a fire or power failure. And unlike government products, loans taken out through Benji can be used by investors to finance renovations to rental housing or rental housing. ” other non-primary residences, thus helping to increase the number of affordable units and potentially alleviate the housing shortage.
The benefits of home improvement loans in creating more affordable housing are not lost on Lewis or advocates of low to middle income borrowers. In addition to recognizing the benefits of home improvement loans over the housing supply, he also argues that products can and should play a greater role in revitalizing neighborhoods and cities and spurring development. additional.
“It’s good for the communities,” he said. “That old downtown house that’s all of a sudden the jewel of the neighborhood, community reinvestment, getting a good tax payment at town hall on something that may have been abandoned or run down, it helps all around, ”he said.