For first-time homebuyers, the lack of quality housing stock has been a concern of the last decade, and even more so during the past year. According to the National Association of REALTORS®, housing inventory remains historically low, down by 29.5% year-over-year as of the end of February 2021.
Even if the inventory of homes for sale was more abundant, the age of American homes will also present a challenge for homebuyers. The median U.S. home is now 39 years old, an indicator the demand for remodeling will remain strong, NAHB Senior Economist Na Zhao says.
The low housing inventory and the lack of modern, affordable homes could become an even bigger issue as we start to come out of the pandemic and more people consider new housing options. The lack of new inventory may shift buyers’ mindsets toward purchasing fixer-uppers.
As the pandemic caused more people to spend time at home, some homeowners grew tired of their homes and began to look for a different house, one that was better equipped to meet their work-from-home and possibly learning-from-home lifestyles. When faced with the lack of homes for sale, remodeling their current home may become a more attractive option.
Whether or not inventory remains tight, a portion of first-time and move-up homebuyers will have to abandon their “I want it now and it needs to be perfect” mentality to consider renovation or rehab upon initial purchase of a home. Homebuyers may have to purchase a home that is not exactly what they were looking for, potentially from existing mid-Century housing stock, and renovate to get their modern appliances, hardwood flooring and spa bathrooms.
Renovation lending will increase and be part of our business for the foreseeable future. Fannie Mae, Freddie Mac and the FHA’s 203(k) renovation loan programs already offer home loan products that allow homebuyers to upgrade their current home, or purchase and remodel. The VA offered a similar program but it was suspended at the onset of the COVID-19 outbreak.
Opportunities in the market
There have been more requests for renovation lending and, we can expect more lenders to be interested in this market. While aggregators are exiting the market, many correspondent lenders want to offer these types of loans, but are hindered by barriers to entry or unsure of where to start.
With nuances different than a typical mortgage, renovation loans present a learning curve for staff that are unfamiliar with its specific, distinct differences. Adding staff or educating existing staff is the ante to enter this market.
Because it can be very expensive to add that skilled staff, one way that correspondent sellers are looking to enter the market is by partnering with aggregators who will offer them a non-delegated renovation loan product. Through those partnership correspondent sellers gain instant expertise about the origination process and some of the processing, improving their ability to effectively manage renovation loans.
However, it is worth noting that this will not alleviate all additional costs. There is still some cost that comes with this for the correspondent seller, including having the appropriate amount of staff in place to process the loans. Also, the aggregator will not escape additional costs as they must maintain staff in some higher-cost areas, such as processing and underwriting, to guide those customers down the path.
In addition, to successfully offer these loans, correspondent sellers will have to make a commitment to providing education and adding skilled staff to manage these loans. To make the most out of the aggregators’ expertise, it is crucial that correspondent lenders take the time to ensure that the correct processor and the right staff are in place to manage these distinctly different processes, either by hiring staff with previous experience with renovation loans or offering existing staff education opportunities so that they may grow more familiar with its nuances. If this level of commitment is not ready to be made, it is not time to enter renovation lending.
Simply put, the cure for the housing stock problem is renovation loans. By taking the time to thoroughly select and train their staff to make the most out of the aggregators’ guidance, interested correspondent lenders will be well-equipped to enter this market. The interest in renovation lending is greater than what has been seen in a long time, and these loans can put homebuyers in the quality homes they imagined, even in a tight market.
The views and opinions expressed in this article are those of the author and do not necessarily reflect or represent the views, policy, or position of Planet Home Lending, LLC.
Jim Loving is SVP of Correspondent Sales at Planet Home Lending. Planet Home Lending, LLC, is a national mortgage lender and servicer delivering exceptional customer experiences to American homeowners and homebuyers. Offering affordable home loans backed by Fannie Mae, Freddie Mac, VA, FHA, USDA and private funders, it fulfills homeownership dreams for people in 47 states, Washington, D.C., Puerto Rico, and the U.S. Virgin Islands.