The pandemic created conditions that led many to seek out home renovations, and as refinances dry up and purchase loans are harder to come by, lenders are leaning into the trend.
While renovation loan products have existed for decades, some mortgage banks recently ramped up their efforts with these products, creating specific new roles or teams to tap into their potential. In an increasingly competitive housing market, home improvement options can recapture clients and attract new ones, and although it won’t solve the most pressing housing issues in the current environment, renovations might also provide antidotes to ease them.
“If you look at the amount of home equity that's built in America, it's probably the largest amount of equity that consumers have ever garnered in the history of lending. So our view of it was that this is another avenue, another channel for us to actually help the consumer,” said Bill Dallas, president of Finance of America Mortgage, which introduced its own home-improvement vertical in 2021 following its acquisition of Renovate America’s assets.
Other lenders including Homespire Mortgage, NFM Lending and Diamond Residential Mortgage, also branched further into renovation loans this year, in part to streamline operations of existing products, such as those offered by Fannie Mae and Freddie Mac, in addition to the Federal Housing Administration’s long-standing 203K loan, which allows borrowers to add a renovation loan to a traditional purchase or refinance mortgage application.
Newer offerings, such as Freddie Mac’s slimmer version of its renovation mortgage for lower-cost projects rolled out in 2021. And while it has long offered the 203K and renovation products in its commercial business, Finance of America built out its new platform to focus on a standalone product for residential borrowers.
The companies are responding to a robust market that saw home improvement spending increase in 2020. Some see renovation lending as providing opportunities to a new set of borrowers trying to achieve homeownership in a market with limited supply but increased competition.
“When you’re in a driving market where consumers are purchasing homes qualified at $300,000, there’s maybe a multitude of three properties. Well, if there's a home that’s at $200,000, and they want to put 100 grand into it for renovation, that opens up their realm of possibilities,” said Listy Limon, vice president of national production.at Homespire Mortgage.
“Renovation products — when people do it well and really know about it — it is something that helps,” she said.
But “doing it well” is not a simple task when only a handful of such products are commonly available. In addition to those from the FHA, Fannie Mae and Freddie Mac, the Department of Veterans Affairs offers a similar product. The terms of such loans can be challenging for both those originating and taking them, which led lenders to make a more concerted effort towards marketing them and providing education about them.
“A lot of times, we were finding the real estate agents really were not understanding or knew a lot about the product, and they hear about contractors and renovation, and everybody kind of runs away from it,” said Limon.
Homespire has a team of five currently focused on renovation lending that includes specialist and author David Lewis, who was tapped as its national renovation lending manager earlier this year to oversee growth of the program and to educate loan officers and staff.
“It takes a whole lot of experience and expertise to understand the moving parts associated with getting these loans processed, underwritten and closed in a timely fashion,” Lewis said. “Most loan officers – they don't see enough of this volume on a consistent basis at least in their own personal pipelines compared to regular refinance or purchase transactions to really understand it to the depth that they need to for a smooth transaction.”
The current state of U.S. housing points to the growing need for renovation work. According to researchers at Freddie Mac, almost 80% of the country’s housing was at least 20 years old in 2019, with the highest percentage of older homes in California, the Midwest, Mid-Atlantic and Northeast. In some states, the median age of homes are between 40 to 60 years old.
“Everything stems from housing that’s aged. You're using 50-year-old systems now,” Dallas said about what was driving interest into Finance of America’s home improvement platform.
The age of U.S. housing stock was made clear to many by the COVID-19 pandemic, when homeowners suddenly had to accommodate and adapt to modern technology to do their jobs or attend school.
“The desire to now use your home for multiple uses creates demand on the systems. And that creates demand on ‘I gotta do something,’” Dallas said.
The pandemic also caused people to reevaluate their relationships to their living spaces and highlighted the need for upgrades.
“Another market factor driving a renovation refinance is really how COVID has taught us or forced us to live with education at home, work from home, fitness from home, staycation from home,” Lewis said. “People are viewing their spaces in a much different light.”
An unexpected spike in property values came along with the pandemic, suddenly providing homeowners with increased capital to make the upgrades they might require or want. It also allowed homeowners to create a type of home thought to be out of reach in a hot housing market, where multiple bids on a single residence are not uncommon, according to Lewis.
Buyers are unlikely to land a house with every item on their wish list unless opting for a new construction. Many, instead, often make a lateral move and then find out they can take a renovation loan to get some of those desired amenities, Lewis said.
“The beauty of a renovation loan is we can access the forward equity based on renovations, but we access it now before it's actually built.”
While most lenders are developing their renovation-lending units to market government loans taken in conjunction with purchase and refinance mortgages, Finance of America was able to adopt a different strategy for its home-improvement vertical after acquiring Benji, the former Renovate America platform.
“That's where I think the benefit has come to us. It's a whole other avenue of what I would say would be customer acquisition,” Dallas said.
While the company designed Benji with the thought that its loans would lead to safety-related and other upgrades for homeowners, Dallas said a sizable number — approximately 25-30% thus far — have been taken to address the effects of a crisis or other “catastrophic” event, like a fire or electrical failure. And unlike government products, loans taken through Benji can be used by investors to finance renovations of rentals or other nonprimary residences, helping drive an increase in affordable units and potentially alleviating housing shortages.
The benefits of renovation loans in creating more affordable housing is not lost on Lewis or on advocates for low-to-middle income borrowers. In addition to recognizing the positives connected with home-improvement loans on housing supply, he also says the products can and should play a bigger role in revitalizing neighborhoods and cities and spur additional development.
“It’s good for communities,” he said. “That older home downtown that's all of a sudden the gem of the block, community reinvestment, getting a good tax payment into Town Hall on something that may have been abandoned or rundown, it helps all the way around,” he said.