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   ARTICLE   |   From Scotsman Guide Residential Edition   |   December 2016

Renovation Lending Is on the Rise

The time is right to add reno loans to your origination tool belt

Renovation Lending Is on the RiseIt seems everywhere you turn these days there is another story about low housing inventory and how borrowers are having a hard time finding the homes they want. Renovation loans can help overcome these challenges by making improvements, updates or modifications to the homes that are available.

Strengthening market conditions and consumer confidence in home values have encouraged borrowers to invest more in home improvements, such as kitchen and bath remodels, room additions, decks, replacement of worn components or completing deferred maintenance. As a result, renovation lending is on the rise, so if you haven’t already done so, now is a perfect time to add these programs to your lending arsenal.

Thanks in no small part to the popularity of cable TV renovation shows, homeowners are now less reluctant — and in many cases more eager — to take on renovation projects. These shows illustrate how homeowners can add value to their homes by improving the home’s condition, style and functionality. People are often amazed by the transformations revealed at the end of each show.

These shows are great for inspiration and actually get homeowners excited about transforming their homes. It is easy to see why these shows are so popular to a variety of viewers. They help give current and future homeowners ideas for things they can do to improve their properties and even add value to their major investment.

Selling the benefits

Even with borrowers well primed by cable shows, originators may still need to point out the benefits of renovation lending to potential clients and referral partners. One interesting point is that renovation projects are generally more environmentally friendly than alternatives. Contrary to popular belief, the environmental benefits of reusing and renovating homes actually outweigh the benefits of constructing new energy-efficient homes.

According to the National Trust for Historic Preservation, a new home that is 30 percent more efficient than the average home takes 10 to 80 years to overcome the negative climate-change impacts resulting from that new construction. How many of your borrowers realized that home renovations are also green?  

Renovation-lending programs also give originators a powerful tool to help their Realtor partners overcome obstacles with first-time homebuyers. First-time homebuyers can be tough because they sometimes can’t find a home that fits their specific needs or demands in a location they like at a price they can afford. They also may believe they don’t have the funds necessary to complete home renovations or even purchase needed appliances in a fixer-upper.

Renovation lending programs often can provide financing for these items in loan amounts within the price ranges of these first-time borrowers. The right program even can offer new opportunities and expand these borrowers’ options, which in turn can get them into an area where they want to live while still fulfilling their wish lists and achieving their needs exactly.

These programs also have the potential to be the foundation of a great marketing campaign targeting Realtors who work in older neighborhoods or have a lot of fixer-upper listings. Renovation lending can help listing agents who are having difficulty moving properties that are older, outdated or have a laundry list of deferred maintenance issues. These can sometimes be challenging properties for traditional financing as well because they may not even meet minimum property standards for financing. Renovation lending can help overcome all of these challenges and turn a tough-to-sell, nonfinanceable property into a closed transaction for the originator and Realtor, as well as the borrower’s dream home.

Learning the process

Renovation-loan programs can be used for financing the purchase or refinance of a property. They cover the cost of the home as well as any repairs, upgrades and inspections all in a single loan. The loan amount can often exceed the current value of the home because the loan amount is based in part on the value of the home after the renovation has been completed.

Originating renovation loans basically boils down to completing a few
additional forms, bidding for repairs and getting contractor approval.

Borrowers often benefit by adding immediate equity to their home through renovation without piling up debt on high-interest-rate credit cards for home repairs or upgrades. Because renovation programs can be used for both purchase and refinance, the benefits extend to homeowners who wish to address deferred maintenance or otherwise improve their current residence rather than move out of the neighborhood they love. The flexibility of the programs allow homeowners to personalize their home improvements to meet the specific needs of their property, or just get the kitchen or master bathroom they’ve always dreamed about.

Originators often shy away from renovation-lending programs because they believe the process can be intimidating. Don’t let old perceptions discourage you from embracing these programs. Skilled training, the right tools and a knowledgeable lending partner can help you become the renovation-loan leader in your area.

Originating renovation loans basically boils down to completing a few additional forms, making a bid for repairs and getting contractor approval. That’s it. When broken down, these programs are actually a fairly simple process, and originators will soon wonder why they steered clear of them in the past. It is important to work with a lender that provides the right training, however.

A lender that has experience with these programs can educate originators on the steps of the origination process, provide step-by-step instructions on how to fill out the forms, and explain the exact requirements for selecting a contractor and getting the bid approved. The lender also should teach originators how to get the most out of using a U.S. Department of Housing and Urban Development consultant, provide information on how to overcome stumbling blocks, offer quick tips for simplifying the process, and even help build marketing campaigns. In short, a good renovation lender can help you set yourself up for success.

Upfront training like this will give originators the ability to educate their borrowers and real estate partners on what to expect during the process from application to construction completion. Being able to provide step-by-step instructions to borrowers as they move through the loan process, closing and subsequent construction phase will help set up those borrowers for success. Typical training consists of webinars, but some lenders also will conduct on-site, in-person training, so don’t be afraid to ask. These on-site sessions even can open doors to network with Realtor partners who also would benefit from the training.

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The renovation-loan market has grown amazingly over the past few years as home prices have climbed. Working with lenders that offer renovation loans is a great way for originators to close more loans and attract a new audience of first-time homebuyers. Being able to offer these programs can open doors and build relationships by overcoming challenging hurdles to homeownership and home financing. Now is the right time to take another look at adding renovation lending to your tool belt and letting it help you build your business to new levels of success.


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