Financing for home remodeling has never been harder to obtain. Here's what you can do to make it easier for your clients.
The well of work has gone dry for many remodelers, but it's overflowing at Riggs Construction & Design. Bill Riggs says his Kirkwood, Mo., company is "extremely busy," largely because Riggs has teamed up with a local bank to help his remodeling clients obtain financing.
In Seattle, Denny Conner refers Conner Remodeling and Design clients to another stable lender nearby that offers an attractive, innovative loan package. "It's a Godsend from my perspective," Conner says.
"Extremely busy" and "Godsend" are words seldom heard these days to describe remodeling business circumstances. Many homeowners are hurting financially and reluctant to launch home improvement projects. Even those who want to remodel and are worthy would-be borrowers are hitting a financial brick wall of strict, conservative loan qualification practices.
Today many lenders, particularly large national companies, are basing loan decisions solely on the numbers. Borrowers must have excellent credit, including a FICO credit score of 660 or above, says Angie Harper of All Star Construction in Houston. Property appraisals tend to be low and few lenders are willing to base loan amounts on a property's post-remodeling value. According to Bruce Christensen of GE Money, which specializes in quick-approval loans of $25,000 or less, lenders making large remodeling loans that used to advance 110 percent of a home's value now will not lend above 80 percent of that value.
Flexibility and individual consideration have disappeared from the loan approval process at most lending institutions. The loans that do go through often take a longer time — and therefore cost more — to close.
But Riggs, Conner and other enterprising contractors around the country have found ways to overcome these obstacles.
Near-record levels of homeowners owe more than their homes are worth, making it nearly impossible for them to get home equity financing for remodeling.
Riggs has a win-win connection with Eagle Bank and Trust, a healthy local bank. Since Riggs does his business banking at Eagle, he knows the staff and they know him. "The big key is having a relationship with the bank," he says. Eagle is willing to refinance mortgages for Riggs's clients with remodeling costs rolled in. The borrowers' monthly payments can remain the same or even decrease, depending on the loan term.
"People are scared of banks and financing now," says Riggs. "The system that we set up with the bank has made it easy for [qualified] clients; they don't have to do much. A lot of clients ask if we do financing. I say we don't, we're in business to be remodelers." Yet he is able to refer them to loan officers at Eagle who, in a low-pressure way, present the mortgage refinance program. Eagle features Riggs Construction & Design in home remodeling loan ads that run regularly in the local weekly. "We get a lot of calls from that," Riggs says. A sheet in his presentation package points out that it's a good time to borrow because interest rates are low, and it references Eagle's refinance plan.
The situation is worst in the former boom Sunbelt stateswhere home prices exploded and the industrial Midwest where the collapse of the auto industry has hurt employment.
Conner has a mutually beneficial relationship with a Seattle branch of Washington Federal Savings. The two understand each other's systems and refer clients to each other. Washington Federal offers an all-in-one custom construction/remodel loan that, the lender's brochure says, "wraps construction and permanent financing together" in one package with one closing and one set of fees. Borrowers lock in an interest rate for a 30-year, fixed-rate loan before construction starts. Branch manager Karen Hlinka says, "We manage [loan] projects right out of our branches."
"Washington Federal is about the only bank I know right now that has a customer friendly program like that," says Conner. "They are able to be a little more flexible because they fund their own mortgages and do not package them for resale."
Remodeling clients still can borrow from national institutions, though it can be trickier to find a good fit with a lender. That's why Mike Daniel of Legacy Design Build Remodeling in Scottsdale, Ariz., introduces his clients to Patrick Gavin, a Certified Mortgage Planner Specialist in Phoenix whom Daniel knows well and trusts. With access to about 60 mortgage companies, including large national lenders, Gavin says he can find the best loan options for each Legacy client. "If there's any possibility of getting the project financed," says Daniel, "[Gavin is] the one who will make it happen for us."
Paul Paniagua of All Pro Builders in Fullerton, Calif., has worked with one mortgage broker for years. Paniagua no longer offers basic financing himself — "I can't chance it," he says — but the broker continues to help All Pro clients get the loans they need. The broker's flyers are in All Pro's presentation packets and Paniagua offers to call the broker on clients' behalf to pass along information about their planned projects.
Paniagua "brokered" another relationship as well. After an online search for new opportunities to make loans available to his clients, he chose a program offered by the local gas company. Essentially a preferred contractor for the utility, Paniagua can have his clients complete a simple application online for loans up to $20,000. The applications are processed within 24 hours.
Metropolitan Washington, D.C., remodeler Chris Landis uses the Landis Construction Corp. Web site to facilitate the loan search process for clients. A financing page on the site features loan calculators plus contact information and hyperlinks for two lenders Landis recommends — a local bank and a Wells Fargo Home Mortgage consultant. Local banks know Landis' business and tend to be "more flexible, more action oriented," he says, and Wells Fargo "has a strong 203k program."
An FHA program, 203k bases loans on the value of the improved home. Robert Cohen, a Wells Fargo mortgage consultant in Washington, D.C., says 203k funds are placed in escrow and issued directly to the contractor as improvements are installed. "Remodelers have to use their line of credit to pay for the work up front," says Cohen, "but they know they are getting their money."
In Houston, Angie Harper eliminates the headache of borrowing by handling the whole loan application procedure for All Star clients. "We know the process, do it a lot and can do it quickly," she says. "We know where we can get things done for the lowest rates and fees."
The sweetest part of All Star's loan application service? "We can use it as a closing point" — a contingency clause in the proposal, says Harper. If All Star finds satisfactory financing for clients, they agree to sign a remodeling contract.