Renovation Loans: A Unique Opportunity for Mortgage Originators

The mortgage industry is going through a transition period right now. Whether you’re a broker or a loan officer, you’ll need to change with the market and find new ways to sell if you want to grow your income or your business.

When a market changes, you really have just two choices:

1. You can change the way you do business and what you sell. Sure, this is scary, but it’s also an opportunity to thrive.
2. You can do exactly what you’ve been doing and hope you manage to survive the changes. This is a big risk because you’ll be fighting market forces.

Home sales are consistent, but when mortgage rates rise, refinances all but dry up. No one wants to refinance at a higher rate, clearly. So every mortgage originator who specialized in refinances over the last ten years is suddenly a purchase expert. You’re all competing for the same customers now.

It’s smart to use your loan managing skills to offer additional products to the audience you know well – homeowners. If you market yourself as a unique expert who knows how to process a very specific kind of loan, customers will flock to your door.

What Are Renovation Loans?

Renovation loans are clever financial products that allow borrowers to take out money through the mortgage based on the after-improved value of the home. Since the financing is amortized into the mortgage, the monthly payments are extremely affordable for most homeowners.

Plus, renovation loans let homeowners finance their improvements using the mortgage’s low interest rate. Even though rates are climbing, mortgage interest rates are substantially lower than personal loans or credit cards, so this is an attractively affordable option.

Your borrowers have a few choices for their renovation loan.

• FHA 203K
• FHA 203K Limited
• HomeStyle Renovation

The FHA 203K loans have some slight differences, but both let you borrow up to 96.5% of the appraised value of the home, where the appraised value includes the repairs or improvements you will make. Ultimately it lets you borrow more than the home’s current value.

The HomeStyle Renovation loan lets borrowers obtain a purchase transaction mortgage (or limited cash-out refinance mortgage) with funds to cover the cost of repairs, renovations, or improvements. This type of loan requires a 10% down payment.

Why Do People Take Out Renovation Loans?

Homeowners take out loans to fix problems and make improvements to their residences. Now that mortgage rates have begun to rise, renovators are seeking loan because they know there won’t be a better time for the next few years to get cheap financing.

In some cases, homeowners renovate to make their homes more personally satisfying. People rarely buy homes that meet their exact needs and wants, so a little work is almost always necessary. In other cases, they renovate their homes to raise the value to sell.

What kinds of renovations do people make?

• Basement remodels
• Bathroom and kitchen updates
• Minor layout changes (that don’t affect the home’s footprint)
• Outdoor additions (decks, patios, walkways, and steps)
• Major landscaping (soft and hardscaping)
• Flooring material changes

Pool loans are a popular types of renovation financing that are especially lucrative to brokers. Pools aren’t cheap, but they add a lot of personal and financial value to a home.

According to AngelList, the typical above ground pool with deck costs about $10,000. In-ground poured concrete pools can cost $17,000 to $45,000, with the average costing about $25,000. Fiberglass pools can cost anywhere from $10,000 to $60,000.

Those numbers don’t include the typical amenities most pool owners want, like patios, decks, firepits, walkways, outdoor kitchens, diving boards, water slides, etc. If they’re financing the deal, they’ll also consider outdoor furniture and a few expensive pool toys.

Solar panels are another popular type of home renovation people seek these days. Solar panels are tough to estimate because their costs rely on a number of variables, but they can range from $10,000 to $40,000. It’s possible to lease solar panels or finance through the installer, but many people prefer to finance independently so they maintain complete control over their system.

Renovation Loan Referrals

Renovation loans are especially lucrative because you have an easy referral source at your disposal: Contractors and installers.

Contractors are an easy connection to the buyer. The buyer requests a quote from an installer and the installer refers you as an easy way to finance the project. You don’t have to market yourself to every homeowner, just the handful of contractors in your area.

In these types of arrangements, your contractor partners can make more money because they have a new tool to convince customers to make renovations. You make more money because you gain a fleet of active salesmen (the contractors) who persuade their customers to call you about loans.

In fact, contractor partners won’t just sell to homeowners. They’ll also sell to people who are in the process of buying homes or people in the process of building custom homes.

Realtor Renovation Referrals

Contractors are useful, but you shouldn’t ignore your realtor referral sources. They may not be able to refer all their purchase clients to you, but they probably come across a few people each month who want to obtain additional financing to have work done to their new purchases.

It’s a seller’s market right now, so many homebuyers are forced to purchase homes they don’t completely love. Maybe the kitchen appliances aren’t modern enough, or the front of the house lacks a porch they crave, or they really need some more counter space.

If you position yourself as an expert on renovation loans who can offer affordable and flexible solutions, you won’t just snag a bunch of renovation financing deals. You’ll also get a larger share of purchase loans because the realtors will prefer to recommend their clients to a single source of financing.

In many cases, a standard mortgage might turn into a renovation loan. Your clients will appreciate your ability to break down the options, educate them, and recommend the best solution.

Hard to Sell Homes

Another simple way to find renovation loans is to start with the property. Go after houses whose owners have had a hard time selling for some time.

For instance, target homes that have been on the Multiple Listing Service (MLS) for 60+ days, especially if comparable houses in the neighborhood have been selling quickly. Reach out to those realtors and homeowners and ask about their challenges.

Properties that are priced well shouldn’t have a hard time selling, so there’s a good chance something is wrong with the property that turns off potential buyers. They might need a few basic updates to make the house competitive, or some major renovations that add more value to the house than they cost. Offer some renovation financing options to address those challenges.

If you really want to be aggressive, consult with a contractor or designer to put together a display of samples. Include tiles, carpet swatches, fabrics, paint colors, etc. If a realtor referral source thinks a client may want a renovation loan, you can lend him/her your display to help convince the borrowers.

Admittedly, that’s a lot of work, but it’s a powerful way you can give to your referral sources. They can show their clients what a potential home would look like with some alterations. You and the realtor get the deal and the buyer gets the home of their dreams.

You might also find a few properties in your area that “can’t be financed.” Often this occurs when a property is in such poor condition that it’s unlivable. They might be viewed as tear-downs, so they’re cheap and only available to a small group of cash buyers.

In some cases, however, these kinds of properties can be renovated to a sellable condition, especially if their problems stem from single issues, like a crack in the foundation, a broken load-bearing beam, or code violations. A renovation loan might be all the seller needs to repair the property or make it attractive to sell.

Change with the Economy

Should you specialize in renovation loans to the exclusion of mortgage originations? Not unless you develop an unexpected knack for renovation loan marketing that sets you apart from all the other brokers and loan officers. But renovation loans are a unique product that may help you stay afloat and even grow your income as the economy changes.