Finding solutions to one of today’s biggest market challenges: Part 1
As I do most Saturday mornings, I awoke with an ambitious to-do list scattered across categories from housework to kid’s afternoon activities to an evening on the town. And then the inevitable happened. I settled onto my couch with a fresh, hot cup of coffee and made one critical mistake…I turned on HGTV. Next thing I knew I had surrendered three hours to Chip and Joanna Gaines and the Scott Brothers as house after broken house was transformed into the home of every homeowner’s dreams! So much for today’s to-do list…
The rash of home makeover shows is not just a fad, it is a clear response to one of today’s biggest challenges – satisfying the needs of a revitalized interest in homeownership. There is one significant obstacle in filling this need – INVENTORY!
The inventory challenges we face varies by market but include obstacles such as:
- Lack of affordable first-time homebuyer properties (FTHB represent 38% of the market)
- Current owners are staying put, slowing the move-up market – and trend will expand should interest rates rise (average length of homeownership tenure has expanded from 4.25 years in 2008 to 8 years in 2016 per D. Blomquist, Attom Data Solutions)
- Sellers won’t list before they have found the home they want to buy
- Equity concerns
- Shortage of new construction in entry-level housing (median age of homes sold has nearly doubled since housing collapse from 15 to 28 – S Olsen, Zillow)
These factors lead us to potentially making compromises in our homeownership decisions. Prospective homebuyers may need to expand their market area or recognize that purchasing a home that needs some TLC may be their best option. Current homeowners may look to tackle the home improvement list rather than buying something new! Who would want to leave that awesome cul-de-sac anyways? Right?
These consumer decisions open up significant opportunity for mortgage lenders today looking for specialty product offerings including The Renovation Loan! This product is quickly becoming the talk of the industry. But what are they and who can offer them?
After some research, this is what I have discovered.
Fannie Mae and Freddie Mac both offer renovation products. For the purposes of this discussion, I will focus on Fannie Mae. Seller/Servicers must qualify for and obtain a variance from Fannie Mae in order to be approved to offer renovation programs. Fannie Mae’s approval requires a lender have renovation lending experience. Lenders must develop a mechanism for managing the distribution of funds to the builder while the renovation project is being completed. Many depositories gain this experience through portfolio product offerings.
Fannie Mae renovation loans can be a purchase or refinance transaction with minimal overlays to standard purchase or refinance transaction guidelines (not to exceed 95% LTV) supporting buyers who are buying that fixer-upper or the current homeowner who is tackling home improvements, additions, etc. Highlights of Fannie Mae’s program are outlined below. Portfolio lenders with no intent to sell their renovation product to Fannie Mae have flexibility to structure their loan program to their own risk tolerance. In speaking for Genworth Mortgage Insurance, we support and insure Fannie Mae’s program.
- Eligible properties are new or existing properties, condos and PUDS (no manufactured housing), primary residence, second home or investment property (standard LTV limits apply)
- Renovation funds shall not exceed 50% of the “AS-COMPLETED” appraised value
- Renovation funds may include: labor/material, soft costs (fees/permits), 10% contingency reserve, and up to 6 months PITI payments should the borrower need to vacate property for renovation
- Unused funds may be used to pay down the unpaid principal balance and/or fund additional improvements that are permanent and add value
- Scheduled renovation work must be affixed to the property and add value
- Contractor must be registered, licensed and reputable (documented contractor approval process should be maintained)
- DIY projects allowed: only when renovation funds do not exceed 10% of value of home, material cost only and restricted to 1 unit, owner-occupied home
Purchase price of home = $100,000
Cost of renovation = $150,000
As-completed value = $250,000
Total available for renovation = $125,000
Borrower’s investment/down payment = $25,000 for net LTV of 90%
Funding and Payments:
Renovation loans are 100% funded at the time of loan closing with a fully amortizing payment schedule. Upon loan closing, the lender holds the funds for renovation in an interest-bearing custodial or escrow account. As the construction proceeds, the builder submits disbursement requests directly to the lender who verifies, through title and appraisal updates, that work is proceeding at the expected pace.
This sounds a lot like a Construction Loan, right? What’s the difference? Great question! There are many similarities that we can explore – check back next edition as we continue the discussion.
But for now, time to top off the cup of coffee and get back to that to-do list!