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Homeowners with plans to add onto their house or to undertake major renovations have typically turned to home equity loans or home equity lines of credit (HELOCS) to finance their projects. These loan products are extremely useful and can be quite versatile as well. Simply put, homeowners are allowed to borrow a percentage (usually 90% - sometimes 95%) of the equity they have accrued in their home. As their name suggests, these loans are driven by current equity and so are heavily reliant upon the appraised value. Thus, if the appraised value comes in below expectations or if the owner recently purchased the house and so has not built very much equity, these loan products are of little use. Faced with little equity in the house, homeowners should not be deterred. Financing for a renovation or addition can be obtained through a construction to permanent rehabilitation loan. A rehab loan is similarly dependent upon an appraisal. When ordering the appraisal for such a loan, I simply request the appraiser to calculate the completed value of the home based on the plans and specs to be provided by the builder or contractor. The owner can borrow up to 90% of the completed value. Unlike a straight purchase transaction, this type of loan closes early in the process, before the construction work begins. The lender will insist upon occupying first lien position, so the existing mortgage would be paid off at closing. Money is disbursed in a series of draws for work completed in the construction period, during which the owner can pay interest only. Once the construction is completed, the borrower has the same “end” loan options available for a standard purchase or refinance: 15 or 30 year fixed rate, adjustable rate, hybrid ARM, and so on. To see the benefit of such a loan, consider the following example. A past client called me last spring to explore his options for financing a family room he wanted to add to his house. Because he put down 10% when he purchased the house 2 years ago, he had not yet accumulated the equity required to use a HELOC loan. The balance on his mortgage was $205,000, the house was worth approximately $255,000, and the anticipated project costs were $115,000. I provided the plans, cost of materials, and cost of construction documents to the appraiser who calculated a completed value of $415,000. The borrower was then able to borrow up to $373,500 (90% of the completed value), more than enough to cover the payoff of their existing mortgage, the construction costs, and the closing costs, a total of $365,000. Despite the fact that construction was expected to last only six months, I informed my client that he could lock in for a full 12 months at the same rate available for a six month lock. By doing so, he had the option of paying interest only for the first six months after the work was completed. At the end of the 12 month lock, my client began making regular principle and interest payments on the 15 year, fixed “end” loan that he opted for. The end result was a client that was thrilled to have found a solution to a problem that the other mortgage brokers he spoke with could not offer. As with any other mortgage scenario, a good mortgage professional should strive to structure a loan that fits the client’s needs. Unfortunately, all too often, people are placed in the wrong loan program because the mortgage “professional” tried to force a square peg into a round hole. That is, the client is placed in the wrong loan program because that will make the broker’s job easier and allow him to collect a commission check sooner. If the broker is unable to force their client into the convenient (for the broker) loan program, then the client is told that they are out of luck. In
almost all cases, if the mortgage professional sincerely is looking
out for the client’s best interests and takes the time to
interview the client to ascertain their goals and objectives, a
proper loan will be structured to help the borrower accomplish those
goals. If a loan officer from a bank or broker states that, “I’m
sorry I can’t help you,” what they usually mean is that
they don’t want to help because of the effort required. Ultimately
this is a benefit to you, the mortgage shopper, because you probably
do not want to enter into a transaction with this loan officer anyway.
Why? If a loan officer has already revealed himself to be lazy,
pushy, etc. from the outset, you can imagine how he would handle
your loan, your business, your interest, your questions, and your
concerns throughout the process until the loan closes (if you get
that far). |
