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MortgagePoint » Your Trusted Source for Mortgage Banking and Servicing News 52 March 2024 F E A T U R E S T O R Y prices and limited inventory. Reno- vation loans could become a more accessible means by which they could enter the housing market, encouraging them to consider properties that need renovation and turning them into their dream homes. » Inflation: High inflation continues to make new homes more expensive, incentivizing homeowners to consider renovation projects instead of buying new properties. Based upon the "after improved value" that comes with a renovation loan, it is less expensive for homeowners to refinance their 3% mortgages to the current rate using a renovation-based mortgage. In this market, it would likely be more expen- sive for them to sell their homes; locate and buy new homes (at the current mortgage rate), and pay commissions, closing costs, and moving expenses. What the Renovation Boom May Look Like T he American Dream of homeowner- ship remains a powerful motivator for many. Family and household formation are critical drivers to buying a home. While we may have a housing "shortage," there are still millions of houses out there … it is just a lot more difficult to buy one. Part of that "shortage" could be caused by potential sellers who own properties that do not meet the minimum property requirements for Federal Housing Admin- istration (FHA) financing. While they have the option to sell to a cash investor at a significantly reduced price, they could sell at list price to an owner-occupant using a renovation loan. As people become more educated about the potential of renovation mortgages, we may subsequently see more inventory returned to the market. That is why mortgage lenders seek to make the potentially daunting task of ren- ovating or refurbishing existing inventory easier. Along with the traditional mortgage approval process, there is an added process for the renovation side. Savvy mortgage lenders will offer experienced, specialized teams which can make the renovation process smoother for loan originators and more attractive to borrowers. Lenders have available to them con- ventional, FHA, and VA renovation loans. For each, the loan amount is based upon what the value and condition of the home will be after the renovation work is 100% complete. The FHA 203(k) may have more potential than any other option because a significant number of FHA borrowers lack the financial resources more affluent borrowers might have. FHA also allows the value of the property to be based on 110% of the "after improved value" of the home. This gives the FHA 203(k) borrower the buying power that comes with offering full price for a home and often includes sell- er-paid closing costs. The seller receives full price for a house financed in "as-is" condition while the borrower enjoys a ful- ly renovated home utilizing FHA's flexible guidelines and cash-to-close requirements. First time homeowners will increas- ingly look to traditionally less-appealing houses when their "dream homes" prove too difficult to purchase or remain unavail- able. Any number of renovation products already available, including loans origi- nated in coordination with HUD's 203(k), could encourage new homebuyers to turn fixer-uppers into amazing homes. With growing public concern about the SFR (single-family residence) investment boom of recent years, the 203(k) could curry addi- tional favor among policymakers seeking to curb the influx of investors and increase in rental (vs. ownership). They may find it worthwhile to ease the path for lenders to originate 203(k)-related mortgages. How- ever, any lender seeking to enter this space for the first time needs to fully understand and prepare for the additional require- ments and responsibilities that come with offering 203(k)-related mortgages. With the convergence of powerful forces such as the inventory shortage, high home values, higher interest rates and strong demand for homeownership, renovation loans are likely to become a significant component of the mortgage lender's product mix, offering solutions for current homeowners and first-time homebuyers. This development could prove to be essential for any successful mortgage lender to meet customer needs. While we may have a housing "shortage," there are still millions of houses out there … it is just a lot more difficult to buy one.