A RELATIVELY NEW concept in mortgage financing -- allowing consumers to use a single loan to borrow against the projected future value of improvements to their real estate -- is transforming the booming home renovation market.
Although many potential rehab borrowers still aren't aware of the change in rules, they may now be able to negotiate mortgages that were unthinkable just a few years ago. Unlike in the past, increasing numbers of lenders are rolling estimates of the "as-completed," future market value of renovation proposals into the maximum mortgage amounts they'll extend to applicants.
The result: You can borrow far more on fix-up projects than ever before. You can sometimes walk away with 90 percent to 95 percent of what an appraiser says the property will be worth after all the work is done.
Consider these actual loans closed recently by one East Coast-based mortgage company specializing in "as-completed" rehab financing, Haywood & Associates, of Chevy Chase:
A borrower owned a home valued at $280,000 that needed a substantial renovation to get up to neighborhood standards of size and amenities. The problem was that the owner didn't have much equity in the house, and therefore couldn't do what many owners do -- take out a home equity loan or line of credit to fund the needed improvements. Worse yet, the projected total cost of the renovation was out of sight -- a whopping $257,000, or nearly 92 percent of the current appraised value of the home and lot together.
Solution: A new-fangled, 30-year loan of $535,000 at the then-prevailing market rate of 7 7/8 plus 1 point. One point equals 1 percent of the loan amount. The key to the deal was a professional appraiser's estimate that the as-completed value of the rehab would be about $720,000.
The appraisal was supported by comparable valuations on other houses in the area with similar amenities to the proposed renovations.
Under the lender's maximum loan-to-value ratio guidelines, a $535,000 mortgage on a $720,000 home, even if worth just $280,000 in its current state, was worth the risk.
dTC The buyer of a $200,000 condominium needed another $30,000 to fix the place up. Figuring in the as-completed value of the improvements, the borrower got a $207,000 fixed-rate mortgage -- 103 percent of the actual purchase price of the unit.
Mortgage executives say the trend toward rolling estimated improvement values into mortgages got a big boost two years ago when the Federal Housing Administration (FHA) revised its so-called "203(k)" program for moderate-cost home renovation projects. The 203(k) program allows tiny down payments of 3 percent to 5 percent on the expected market values of the house after renovations.
Huge national mortgage investors like Fannie Mae and Freddie Mac have also jumped into the field, purchasing FHA 203(k) and conventional loans whose amounts and down-payment ratios are based on as-completed values. Fannie Mae, for example, offers what it calls a "HIML" (home improvement mortgage loan) program through participating local lenders across the country. You can borrow up to $207,000 at prevailing rates with a 10 percent down payment based on the as-completed estimated value of the home plus improvements.
For example, a house worth $150,000 on the market today, but projected to be worth $227,000 after substantial renovations, could qualify for a $207,000 HIML mortgage.
A 5 percent down-payment version of the same Fannie Mae program known as "CHIML" -- community home improvement mortgage loan -- is available to lower- and moderate-income borrowers, primarily in central city neighborhoods and other designated census tracts outside central cities. The key difference here: The borrower's income cannot exceed 100 percent of the metropolitan area median, except in California and Boston, where it can go to 120 percent, and New York City, where it can go to 165 percent.
The same innovative principle applies as in the other, new rehab loans: You get extra mortgage cash, predicated on the future market value of the fixed-up property.
How to locate a lender who will apply this concept to your next renovation project, refinancing or home purchase -- plus fix-up? Most mortgage bankers and brokers can plug you into Fannie Mae's or Freddie Mac's programs. Many, but not all, lenders approved to do business with FHA offer the 203(k) loan.
For larger, so-called nonconforming or jumbo projects -- and almost any rehab loan if you've got a subpar credit rating -- your best bet will be to shop local mortgage brokers. They typically deal with multiple lenders, and should be able to find at least one to fit your as-completed rehab objectives.
A couple of caveats: Don't expect the lender to give you dollar-for-dollar credit on your rehab cost estimate. Just because you're spending $50,000 on a gourmet kitchen doesn't mean an appraiser will tack that $50,000 onto your as-completed value.
And don't assume you'll get your extra big loan in a lump sum. To the contrary, there are likely to be multiple "drawdowns" during the rehab process to pay contractors at each stage of the project.
Kenneth R. Harney is a syndicated columnist. Send letters care of the Washington Post Writers Group, 1150 15th St. N.W., Washington, D.C. 20071.
Pub Date: 8/11/96