home-equity-through-renovation-loans

For most of your clients, there are five major areas of spending that will consume more than 50 percent of the money they earn in their lifetime:

  • Home
  • Car
  • Children
  • Education
  • Retirement

Let’s put that in perspective. If your client earns an average of $50,000 per year and works 43 years as an adult (from age 22 to 65), they’d make roughly $2.15 million in their lifetime. About half of that ($1 million) will be spent across these five categories.

Of these major purchases, buying a home is the biggest. But it’s also the one that, if buyers play their cards right, can be the smartest investment they’ll ever make. Not only will buying a home provide a place to make a lifetime of memories, but it can also be a key ingredient in the recipe for building wealth.

How? It’s called home equity.

Home equity is the current market value of a home, minus what the owner owes. The goal is for this to be a positive number. If your home is worth $150,000 and you owe $100,000, your equity is $50,000.

Home owners increase home equity every time they make a payment on the principal balance of their mortgage loan and as the market value of their home increases over time. According to CoreLogic, the Bureau of Labor Statistics, and the Urban Institute, U.S. residential year-over-year home price appreciation averaged 1.89% from 1997 to 2017, adjusted for inflation. Said another way, an owner’s home gains about 2% in value each year.

And there are ways you can help your clients speed up the process.

FHA 203k home renovation loans can give buyers immediate home equity in a property once renovations are complete. By introducing this loan to prospective buyers, you can help them get more house for their buck and accelerate the process of building home equity.

Here’s how it works. The FHA 203k home renovation loan simplifies home renovations by allowing your clients to borrow money for both their home purchase and improvement and repair costs using only one loan. In addition, eligible buyers can qualify for a down payment as low as 3.5 percent. This provides your clients with the best opportunity to build their dream home without severely impacting their cash flow.

Here’s an example:

This buyer purchased a house in Boardman, Ohio for $39,000. They were able to completely renovate the house (exterior and interior) for $30,000 using the FHA 203k home renovation loan, and the home was appraised at $79,000 post-renovation – earning them nearly $10,000 in equity…instantly.

Your clients can move into their new house with the peace of mind that they already have the financing to make the renovations. And, they don’t have to pile up high-interest credit card debt later to fund the remodeling.

Why is this important for agents?

A couple reasons:

  • Simply put, by offering this as a solution to your clients, you drastically increase the chances of repeat business and referrals. If you worked with someone who helped you not only create the home of your dreams, but also earn a chunk of equity in the process, you would be telling anyone and everyone you know about it.
  • Increase your listings’ potential and sell more homes. Not every home you list is a turnkey, HGTV stunner. In fact, it’s much more likely that the majority of houses you list likely will need some TLC. To hesitant homebuyers, this can be a tough sell. Not only are they making the biggest purchase of their lives, but now they also have to put in the time and resources to get it to their liking. With renovation lending, it’s all mapped out for them. They can be more confident in buying a home that will need work knowing that the costs to renovate it are financed through the same loan and spread out over an affordable monthly payment. Learn more about mortgage money here.

Homebuyers taking advantage of these loans are not only one step closer to the home of their dreams, but now they’ve increased their home equity. In the future, we will talk more about how clients can then leverage that equity to their advantage.

If you’d like to learn more about offering renovation lending as a solution to your clients, we invite you to give us a call at: (330) 965-1808

If you have listings that you feel would be good candidates to leverage home renovation lending, take a look at this article that discusses creative ways to write the listing descriptions for them.

*Not all borrowers will qualify. Contact us for more information on fees and terms. Not intended as legal, financial, or investment advice. Contact your financial representative for more information.

Homeowner Equity Report. (n.d.). Retrieved January 15, 2021, from https://www.corelogic.com/insights-download/homeowner-equity-report.aspx