Enterprising mortgage industry leaders are positive, forward thinkers. Problems don’t drag them down — they inspire them to create new solutions. They innovate new non-qualified mortgage (non-QM) loans for self-employed borrowers who might not otherwise qualify for an agency mortgage. They develop new generations of second-lien products when large swaths of the homebuying population opt to renovate their existing homes rather than move.
Now these eternally optimistic leaders are at it again. This time, the challenge they’re tackling is the national housing shortage.
According to a recent Zillow analysis of census data, the U.S. faces a shortfall of 4.7 million housing units, a record high. This is one factor that’s slowing market activity in many regions. But mortgage executives aren’t wringing their hands. Instead, they’ve introduced residential transition loans (RTLs) for real estate investors, investor developers and builders who want to bring more properties into the marketplace. A groundswell is happening, and the RTL market’s $30 billion to $35 billion value is proof.
What are RTLs? They are short-term project loans for business-purpose investors who want to buy, build, renovate, resell or rent out an investment property. Borrowers use the loans for ground-up construction, fix-and-flips or bridge loans so they can add a new property to their portfolio before selling or refinancing an existing one.
These borrowers are helping fill the housing shortfall, but there is still a much larger need for affordable and quality homes. Today, there are only 11 major markets where median earners are positioned to buy an average-priced property. Six years ago, median earners were able to afford properties in 39 markets, Zillow notes.
Many individuals are renting instead, and the median age of renters reached 42 in 2024, up from 36 in 2000, according to Zillow data. Tenants, like homebuyers, also need more choices that match their income and their lifestyles. Having additional options might allow them to save more quickly for a house or condominium. Nearly half of renter households in major metropolitan areas spend more than 30% of their income on rental payments.
Although property construction is increasing, the opportunity for business-purpose investors to add more inventory is still enormous. The largest U.S. builder brings 80,000 new units to market annually. That’s just 1.7% of the 4.7 million units needed. Many regional developers contribute up to 100 homes every year, representing 60% to 65% of new inventory. They could potentially scale production with additional financing.
RTLs are among their key options. These short-term loans are structured to help real estate investors, investor developers and builders finance new projects — including ground-up construction or renovations and single-phase or multiphase projects spanning single or multiple properties.
RTL-eligible projects include new home construction, along with single- family and two- to four-unit non-owner-occupied residential properties (up to nine units are allowed in California). Loan amounts, terms and draw schedules are based on specific project plans, timelines and key milestones.
Flexibility is a hallmark of these loans. Borrowers can update timelines and even refinance if necessary. When dealing with common challenges such as weather-related events, subcontractor issues, changes to material and labor costs or supply chain interruptions, this enables borrowers to stay on course. RTLs also help investors preserve cash by making interest-only payments during construction, with interest reserves available as needed. Moreover, experienced real estate investors often benefit from higher loan amounts and leverage.
More specific applications for these loans include:
- Financing the costs of constructing a property from the ground up.
- Financing fix-and-flips, including the costs of purchasing a home and making repairs before reselling it for a profit.
- Bridge loans, which give investors the cash to quickly seize new investment opportunities before completing the sale of another property in their portfolio.
In 2022, according to the American Community Survey, the median age of owner-occupied homes was 40 years old, and other experts estimate that today’s average home was built 40 to 50 years ago. Homes of that vintage often need some level of renovation to make them attractive fix-and-flip candidates when the current owners sell.
Mortgage brokers and loan officers who master the finer points of these RTLs often gain a new competitive advantage, as their fellow lenders may not be set up to sell the same products. The loan officers who build strong relationships based on demonstrated expertise are in a better position to earn investors’ confidence and become their go-to partners. Not only might these investors or builders need additional loans, so might other borrowers they know.
Most importantly, residential transition loans empower mortgage brokers and loan officers to work with investors to ensure more Americans have affordable and quality housing options.
