Don’t Hate, Renovate

BY MARY KAY SCULLY, CONTRIBUTOR, NATIONAL MORTGAGE PROFESSIONAL MAGAZINE

Ilove watching HGTV. My favorite shows are all about taking old houses and bringing them back to life or making ugly homes attractive. This got me thinking about how much our industry needs to embrace

Everyone’s concerned about low inventory, but there’s still hope out there. Renovations solve the problem for both homeowners and lenders. Homeowners may not have incentive to move, but they can renovate, and this gives lenders new loans to keep business moving. Let’s talk about renovations and how they’re an important solution in the current market.

House Hunters

First, we need to take a look at the current inventory of homes, for sale and otherwise. According to data from the St. Louis Fed, there are only about 500,000 homes for sale in the U.S. right now. The National Association of Home Builders (NAHB) also has recently reported that the median age of owneroccupied homes was 40. And, to add to all of this, the Census Bureau reported that new housing starts are down from where they were just a year ago. These conditions alone can make the house hunt tricky for many prospective buyers. There are not many homes to choose from, not many new builds to replenish the lack of inventory, and the houses that are out there are only getting older. While this may sound like a recipe for disaster, it actually highlights an opportunity of which lenders should be taking advantage.

Love It Or List It

Buying new is not a very viable option right now, but renovating can help owners fall in love with their homes again. If they need more space, they can build an addition or close in an existing space like a garage. If the borrower is aging, they can complete updates to help make the house more accessible. Or maybe the house is simply dated, and they just want to make updates that make it feel fresh and new again. There is a wide range of possibilities for updates homeowners can complete to make sure their house works for their needs.

One of the HGTV shows I liked is called “Bang for Your Buck,” where viewers got to see two different renovations with the same budget and see which one had the most impact. When borrowers consider renovations, they will likely have questions about what will give them the most return on their investment, just like the show.

According to a 2022 study by Houzz, a company that offers software for, among other things, architecture and interior design, the median national spend on home renovation projects in 2021 was $18,000, and higher budget projects at the top 10% of spend rang in at $100,000. With these price tags, homeowners want to spend these big investments wisely. In these scenarios, make sure homeowners are weighing preference vs. resale value. Of course, they want to make a good return on their investment, but they also need to pick what they will like and what will work best for their specific needs. It’s their home, not just an investment.

Research from the National Association of Realtors (NAR) found that refinishing hardwood floors, installing new wood floors, insulation upgrades, basement conversions, and closet renovations had some of the best return on investment. Weigh that against the fact that NAR also found that different projects like painting the interior of the home, or adding an office brought homeowners the most joy.

Ultimately, those looking to renovate need to decide what’s most important to them.

Frank Lloyd Wright, the American architect, designer, writer, and educator, stated this perfectly, “If you invest wisely in beauty, it will remain with you all the days of your life.”

Fixer Upper

Fannie, Freddie, and the FHA all have products for renovations, but these programs are sometimes forgotten about. It’s important that loan officers know the details so they can help borrowers looking to renovate. These products can help cover:

• Labor and materials

• Soft costs (architect fees, permits, licenses)

• Required contingency reserve funds (which may come from the mortgage proceeds or directly from the borrower)

• An amount up to, but no more than, six monthly payments of principal, interest, taxes and insurance (PITI)

• 50% of the cost of materials, which may be advanced to the contractor at closing

To qualify for these products, the project doesn’t have to be a full teardown. The word renovation, to many people, sounds like it must be a huge overhaul, but these projects also can be updates or enhancements like installing energy efficient heating and cooling systems, improvements to kitchens and bathrooms or even additions.

If you can’t buy the house you love, love the house you’re with. There are plenty of products out there that help homeowners do just that. Being educated about the options can help lenders keep business moving along, even without inventory. n

Mary Kay Scully is the Director of Customer Education at Enact, leading the development of the company’s customer education curriculum. The statements in this article are solely the opinions of Mary Kay Scully and do not necessarily reflect the views of Enact or its management or the opinions and beliefs of HGTV or the productions mentioned.

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