Although the common perception is that financing a remodeling project is more difficult these days, there are several basic options a remodeler can suggest to his clients, according to Dawn Cameron, CRA, 2010-11 president of the National Association of the Remodeling Industry’s Long Island/New York City chapter.
Cameron (NMLS Id: 404400) is a home mortgage consultant and renovation specialist for a major national lender in New York. “When I speak to a remodeler who asks what a homeowner can do to finance a home-improvement project when they don’t have cash, I tell him there are three options,” she says.
The first is the familiar home-equity line of credit, which is a loan a homeowner takes on the current or existing equity in the home. These are sometimes called second mortgages though the term is less commonly used today.
The homeowner also can do a cash-out refinance where he or she borrows above what is owed on the home against whatever equity is in the home already. In essence, the homeowner refinances his mortgage for more than he currently owes and then uses the difference to cover remodeling.
The third option is when the homeowner has no equity in the home. The owner may be purchasing or have just purchased it or the value has recently dropped. “They could be purchasing a home that needs work and only have the minimum down payment,” Cameron comments.
“That’s when the FHA 203(k) loan, which is a federally recognized loan, comes into play,” she says. “This allows the homeowner to borrow the money to pay off the loan or buy the house, depending on if it’s a refinance or a purchase, and also borrow the money to renovate it in one loan. The bank will consider the future or as-finished value of the house,” Cameron explains. This may also be looked at as future equity. (To learn more about the 203(k) Mortgage, see “Financial Solutions,”.)
The bank becomes partnered with the remodeler, and the contractor will be paid directly by the lender as the job is being done.
The loans are arranged directly by the homeowner, but a remodeler can suggest various options. The remodeler is not a party to the loans; he has no financial obligation to this loan, but he will be paid by this loan through the lender.
It benefits the homeowner, Cameron explains, because he or she is borrowing the money at today’s prevailing rates, which are historically low. “You can get that extra $100,000 at 4.5 percent tax deductible. This way a homeowner is able to afford a larger project, which ultimately benefits the contractor, and the homeowner can afford to hire a qualified professional to do the job,” she says.
Cameron cautions that a remodeler should be wary of acting as a financial adviser or appearing to act as a financial adviser. She suggests, rather, that remodelers simply refer clients to someone like her who is affiliated with a lender.
Another reason for remodelers to refer homeowners to a lender fairly early on is that it helps the remodeler determine which would-be clients are qualified; that is, knowing whether the homeowner can afford everything he wants. “It really pays to address financial details very early in the process. I’d say appraisals are less of a problem than clients who have huge eyes and small pockets. They just want all these things but they can’t afford them. Knowing that up front saves the contractor a whole lot of time doing estimates and drawing plans and then not having the homeowner qualify,” she says.
The contractor doesn’t want to or need to be totally educated about loan programs, Cameron says. However, he should have some understanding of lending options. She suggests remodelers tell their clients: “You may have some options that you qualify for as far as financing that would make this very affordable for you. Here’s my friend at the bank; give him or her a call.”
Having an established relationship with a lender is a big advantage for remodelers, Cameron advises. “A contractor also needs to be approved by the bank,” she explains. “We screen them before we start writing them checks. We check their licenses, insurance and references, but once they’re approved, they’re on our list in good standing for two years.”
Being a preapproved contractor cuts at least a week out of the normal loan-processing time, she adds, and it can be a good source of referrals in the case of homeowners who come to a lender without already having a remodeler lined up.