By Allison Landa
Are you looking for a new market to enter? If so, you might want to consider the renovation-loan realm. Developed in the 1970s by the Department of Housing and Urban Development in conjunction with the Federal Housing Administration, the FHA
203(k) loan program offers borrowers an option to bundle financing for a home purchase or refinance, plus with the costs of home improvements, into a single loan.
The program was originally created as a way to assist people in preserving and maintaining older homes in urban neighborhoods. It is also a means for borrowers to buy a property that may not be in alignment with standard FHA requirements due to needed repairs.
There are two types of FHA 203(k) loans: Full and Streamline. Buyers who opt for the Full loan are likely planning larger projects that will require more than $35,000 in improvement costs or projects that are in need of structural repairs. The extent of the amount that can be borrowed depends on the FHA county limit. Full loans allow for the home to be demolished and rebuilt as long as the existing foundation remains. These loan programs require the assistance of a HUD consultant.
The Streamline loan was introduced in December 2005 and is meant for less pricey repairs and improvements such as siding, tiling, painting, new flooring, roofing and appliances. This loan maxes out at $35,000 – none of which can be used for structural costs or landscaping – and does not require the services of a HUD consultant.
Fannie Mae also offers a renovation loan product. The HomeStyle loan allows borrowers to include financing for home improvements in the purchase or refinance transaction of an existing home. It is billed as a convenient method for borrowers to make renovations, repairs or improvements totaling up to 50% of an as-completed appraised value of the property without having to rely on a second mortgage, home equity line of credit or other more costly financing method. Those who are eligible to borrow under this program include homebuyers as well as investors, nonprofit organizations and local government agencies.
These loans will typically run a buyer approximately a percentage point higher than more conventional options and are available in both 15- and 30-year terms with fixed or adjustable rates. Homebuyers must put down at least 5% of the property’s current value and have a minimum credit score of 600. Add in paperwork for costs like appraisal and inspection, and you’re looking at closing costs that exceed $1,000 or higher on average – so it is incumbent upon a broker to make a compelling case for procuring the loan.
The Time Is Now
So why should you consider this particular niche? Carl Markman, director of national sales at Iselin, N.J.-based wholesale lender Real Estate Mortgage Network, believes that now is the moment to take advantage of what promises to be a potentially lucrative market.
“This is the perfect time for loan officers to educate themselves on renovation products – 203(k) and HomeStyle –and begin now to market to their Realtors and other referral sources,” Markman says. Because today’s market includes more inventory in need of repair, he says, renovation loan experts are needed to in order to serve a growing demand.
“There are many potential homebuyers that cannot look past the ‘old’ inventory that’s out there – those 1960s and 1970s outdated ranch and colonial-style houses that have outdated floor plans,” he says.
With plenty of homebuyers willing to put in the work to improve these properties, savvy brokers with industry knowledge will be able to tap into a whole new network of potential clients.
“If the loan officer’s referral base was educated on renovation loans and knew what to look for, they would absolutely sell more homes in 2015,” Markman says. “Our job as loan officers is to help our referral partners sell more loans, and this is the perfect way to do it.” Mortgage brokers can not only make an impact on their bottom line by entering the renovation market, Markman says, but also build long-lasting relationships and earn more money year after year.
Today’s renovation loan market offers alternatives to both potential and existing homebuyers. If a current homeowner doesn’t have the funds for upgrades, a 203(k) loan can give them that flexibility. Markman says these loans also provide opportunities for buyers to purchase a ‘fixer-upper’ that’s less appealing as-is to potential homebuyers. Additionally, he says, the costs to upgrade the property will be included in the repair costs, with no out-of-pocket funds necessary other than the initial down payment.
Renovation loans can be found with most lenders, but according to Markman, not all have the expertise to fund and follow up after the loan closes.
“REMN Wholesale has educated account executives, a renovation lending specialist to help train our broker/banker partners and a renovation concierge desk,” he says. “We are truly specialists when it comes to renovation lending.”
This story appeared in the February/March issue of Mortgage Professional America.