Finding financing for a home improvement-especially if you don’t hold much equity in your home-can take as much perserverance as putting up with the remodeling itself.
“For people who moved into their home several years ago, and have seen the value of their home rise, it is fairly easy to get an equity line of credit or a second mortgage loan for a home improvement,” says Robert Sahadi, vice president for housing initiatives at the Federal National Mortgage Association (Fannie Mae) in Washington. “But if you’ve moved into your home more recently, your equity and value probably haven’t risen much, and financing is more difficult or expensive.”
Equity represents your actual ownership stake in the property. For instance, if you bought a $125,000 home two years ago and put down $25,000, and the home is now worth $130,000, your equity is about $30,000. That’s because if you sold the house, about $100,000 would go to pay off the mortgage, and the remainder is yours. That’s a rough approximation, because your mortgage balance decreases each year, but in the early years of the mortgage most of your payment goes to interest, and the principal isn’t reduced by much.
At most lending institutions, home improvement loans are readily available for the amount of equity you have exceeding 20 percent of the current market value. In the above example, that would be $4,000. If you refinance a first mortgage and get “cash out,” or extra funds, the extra is also typically limited to the amount of equity over 20 percent.
But that’s only the rule of thumb. Lenders’ standards vary. And there are also programs offered by contractors and home improvement suppliers that can help those teetering at or below the magic 20 percent mark. What’s more, government and non-profit programs can help you pay for improvements if you meet their requirements.
Here’s some advice on how to find money to fund the improvements to make your home your castle.
– Seek a lender. “With us, you really need more than a 20 percent equity stake to qualify for an equity loan that can be used for improvements,” says Joe Liptak, consumer loan manager for St. Paul Federal Bank for Savings, Chicago. “But there are some lenders around who will lend up to 100 percent of the equity of the home, regardless of how much equity the homeowner has.”
Indeed, a homeowner can search the market and find a lender willing to lend the difference between the home’s appraised value and the principal left on the mortgage, says Walter Stoeppelwerth, head of HomeTech Information Systems, a national remodeling publishing and consulting firm based in Bethesda, Md. However, the lender is then accepting more risk, and you’ll pay a higher interest rate on the loan.
“Many times the interest rate is 15 or 16 percent, which is much higher than the cost of regular mortgage financing,” says Sahadi.
The gap in financing availability for those homeowners who bought in the last couple of years, only to witness prices go flat and their equity-building come to a standstill, has prompted Sahadi and others at Fannie Mae to develop more remodeling financing options.
Fannie Mae, which buys mortgages from lenders and thereby sets the standards for many types of mortgage lending, has recently unveiled a “HomeStyle” program to make remodeling money more available. Although no Chicago area lenders currently are involved in offering any of the loans, Sahadi says homeowners should keep their eye out for lenders offering the HomeStyle second mortgage, which allows homeowners loans based on the improved value of their home.
Currently, it can be rather difficult to find a lender who will lend you money based on the after or improved value of your home. “We sometimes lend on the improved value,” says Melina Spinuzza, assistant vice president at First Bank of Highland Park. “An appraiser has to look at the plans and give an estimated future value. And the borrower can’t borrow more than he could qualify for under any other circumstance.”
Another way homeowners can qualify for larger loans is through the FHA Title I program. Lenders can make loans of up to $25,000 for improvements on single-family homes, and up to $12,000 per unit on multifamily residences. The interest rate is a fixed rate and is based on prevailing market rates, and the maximum term is 20 years. If you receive a Title I loan exceeding $15,000, you must have equity in your home equal to the loan amount. Otherwise, equity isn’t an issue. Anyone can apply for a Title I loan, regardless of their income or the value of their home. For more information and a listing of Illinois Title I lenders, call 1-800-733-HOME.
– Look to builders, retailers. The difficulty that homeowners without a lot of equity can encounter in securing financing “is the biggest issue in the remodeling business in the 1990s,” says consultant Stoeppelwerth. So that lack of money doesn’t stand in the way of consumer demand for their products and services, contractors and home improvement retailers are stepping up their own finance plans.
“. . . Lumber stores and the giant home product warehouse stores are getting into financing for both materials and installation,” says Stoeppelwerth.
At Elgin-based Seigle’s Home and Building Centers, for example, “We’re working on setting up a program using our own independent financing that would finance up to $10,000,” says Scott Hartmann, vice president of builder sales.
Securing your loan through a home improvement retailer is similar to buying a car and having the dealer arrange financing. Just as with a bank, if the finance company is lending you money when you don’t have substantial equity, you’ll probably pay a higher interest rate. If your credit record is marred, or if you already are paying more than 36 percent of your income in monthly bills (that’s the standard in obtaining a first mortgage, too), securing the loan may be tough.
Explains Art Richardson, regional vice president of HomeBase Warehouse, which also offers its customers financing on materials and labor: “The finance companies that fund the loans make the decisions.”
Finance companies and banks are more comfortable about making home improvement loans, however, when they are familiar with the company responsible for completing the job. One of the reasons lenders are sometimes timid about going out on a limb on home improvement financing is that they are uneasy about how the work will be completed.
The lender doesn’t assign a higher value to the home until the renovation is complete. As far as the lender is concerned, explains Seymour Turner, general manager of Airoom Inc., a Lincolnwood remodeling company, the home actually loses value when remodeling is under way, because it’s torn up.
That’s why Airoom now has its own mortgage brokerage arm, LAMB Financial, that helps find financing for its customers. LAMB Financial works regularly with a handful of banks and lending companies. With the close familiarity lenders have with Airoom, says Turner, it’s not unusual for homeowners to find financing for up to 80 percent of the anticipated value of their home, or up to 100 percent of the current value. However, most homeowners would have trouble finding such liberal terms on their own.
It’s unusual for a contractor to have a mortgage brokerage arm. “We are the only remodeler I know of in the country that has one,” says Turner.
Villa Park resident Michael Rentzch found a loan much easier to come by when he recently added a family room onto his 2-year-old home. “First, we went to a mortgage broker, who didn’t seem to know what we were talking about and what we were doing. Normandy (Construction Co.), our builder, suggested a banker and it was very smooth.”
Still, one must be creditworthy. “They look at your income and credit record the same way that any other bank would,” says Rentzch.
– Special programs. Many city and village housing departments and non-profit organizations have home improvement money available. To qualify, you usually need to be within certain income ranges or live in certain neighborhoods,.
For instance, the non-profit Chicago Home Improvement Program (CHIP) offers home improvement loans on buildings of up to 12 units for a maximum term of 20 years at an attractive rate.
To qualify for the CHIP funds, says James Wheaton, associate director for lending for Neighborhood Housing Services, a borrower’s family income cannot exceed $56,200. “That is for borrowers in targeted areas,” explains Wheaton, “and the targeted areas cover about 80 percent of the City of Chicago. If you live in one of the non-target areas . . . your income has to be no more than 80 percent of the median for the Chicago metro area, or $38,100 for a family of four.” For more information, call 1-800-773-CHIP.
Wheaton suggests suburban homeowners call their local municipal housing department and ask about any special home improvement loan programs.
For example, Pat Edge, administrative loan specialist for Maywood, says the village receives money from the U.S. Department of Housing and Urban Development each year that it uses to lend to residents for improvements that will bring their homes in line with the local building code.
