Renovation Loans – What agents need to know!

In the studio today, we have Katie Hughes and Michael Kerkhof from Caliber Home Loans and they are going to teach us all about Home Renovation Loans.

Katie Hughes

Michael Kerkhof

Podcast Links

• Find a State Association
• Indiana Association of REALTORS®

Home Renovation Loans Podcast Transcription

Adam Small: Hello and welcome to the Real Estate Marketing Minute. I’m your host Adam Small and with me today is Kimberly Small. Hi, Kim. How are you?
Kimberly Small: Doing great.
Adam Small: Great. And we have two special guests in the room today. The first one is Katie Hughes. Hi, Katie.
Katie Hughes: Hello. How are you?
Adam Small: Doing well, and you?
Katie Hughes: Great, thank you.
Adam Small: Great. And we also have Michael Kerkhof. Hi, Michael. How are you?
Michael Kerkhof: Doing super. Thanks for asking.
Adam Small: Great. Great. Michael and Katie both are loan consultants, and Michael’s got a special designation that he’ll talk about and Katie does too. Let’s start with you, Katie, and let’s just introduce yourself, give us a little bit of your background, and tell us a little bit about you.
Katie Hughes: Yeah, so, my name’s Katie Hughes. I’m with Caliber Home Loans. I’ve been in the real estate and finance industry for eight years. Love lending. I love the problem-solving piece and love helping people realize the home ownership dream.
Adam Small: Great. Great. And Michael.
Michael Kerkhof: Hello, everyone. I am Michael Kerkhof with Caliber Home Loans. I am a designated renovation loan consultant for the company, and Katie and I actually work together as a team. Thanks for having us today.
Adam Small: Well, thanks for being here. We appreciate it. There are a number of reasons why somebody might get into a renovation loan. You know, they’re selling a property, want to update it before they sell it so they can hopefully get more money out of it, they’re going to buy a new one that’s a fixer-upper, that sort of thing, or they just want the place they’re currently living in to look better. What are some of the other scenarios where somebody might use a home renovation loan?
Michael Kerkhof: Renovation loans typically are a choice or a solution from a borrower. Anytime an inspection response may come back that is going to require certain repairs to be done, the seller doesn’t have the funds to do so, a renovation loan’s a really good fit for that scenario. Again, getting back to a customer choice simply allows them to make the repairs more specific to their needs and wants.
Adam Small: Okay. Are there any differences in how each situation should be approached basically depending on what the end goal is. Should they be approached differently?
Michael Kerkhof: No. Renovation loans are all literally done under the same blanket. It’s more specific to the repairs that are actually either required or are the repairs wanting to be done.
Adam Small: Okay.
Kimberly Small: What type of loans are available for renovations?
Katie Hughes: There’s a few different types. FHA 203k is the first one, a 203k Limited versus a Standard, so there’s actually two types of FHA 203ks. For the first one, the 203k Limited is for a minor cosmetic type of repair, so perhaps you want to add in an HVAC to your purchase, perhaps you want to kitchen remodel. But then there’s the FHA Full which is a little more comprehensive and a little bit bigger, so if you’re rebuilding an entire house that’s going to be a great option. Then flipping over to a conventional FNMA Homestyle loan, the Homestyle allows for more flexibility for purchasers or owners and doesn’t necessarily have to have minor restrictions that the FHA 203k has.
Kimberly Small: Are there any loans that are unique and have different qualifications, so it is different for first-time buyers or are there other unique circumstances?
Michael Kerkhof: For renovation, there’s certainly not anything that is specific for any borrower or purchaser and any parameters that they have to meet. It’s available literally to any customer.
Adam Small: It doesn’t matter the type of loan that they already have on their home? Say I’m wanting to renovate my home and I’ve got a VA loan, you know, which they have various requirements and stuff like that for a VA loan. Is a renovation loan impacted by that sort of, the existing mortgage I guess would be the question I have.
Michael Kerkhof: Any existing mortgage is simply treated as a payoff.
Adam Small: Okay.
Michael Kerkhof: Any new renovation product is going to supersede that and also be paid off as well.
Adam Small: Okay.
Katie Hughes: And there is the difference between what we’re talking about, which is a 203k product. That’s replacing what’s called your first mortgage. What it sounds like maybe you’re referring to is a second mortgage.
Adam Small: Right. Right.
Katie Hughes: So, what we’re talking about, first.
Adam Small: So, we’re talking about is replacing the first mortgage. Okay.
Katie Hughes: Exactly.
Adam Small: Okay.
Kimberly Small: In the loan types that you talked about, is it different for each location throughout the United States or are those pretty standard across the board?
Katie Hughes: They’re fairly standard across the board. Indiana will have some specific designations for various borrowers, however the general guidelines are going to be the same.
Kimberly Small: Okay. If someone’s buying a property, is there a benefit to them using the same mortgage company for both their mortgage loan and a renovation loan? You said if it’s a large …
Adam Small: Well, that kind of gets back to the question that we just asked where she was …
Katie Hughes: Right.
Adam Small: … telling us that this is a replacement loan. I shouldn’t really call it a replacement loan per say, but you’re essentially paying off the …
Katie Hughes: It’s a refinance.
Adam Small: With extra for renovation. Right?
Katie Hughes: Correct.
Kimberly Small: Is that just for the one type? If they’re doing minor modifications, is that also a replacement?
Katie Hughes: That would also be the replacement as well …
Kimberly Small: Okay.
Katie Hughes: … regarding what we are talking about.
Kimberly Small: Okay.
Michael Kerkhof: One of the things too that’s pretty key to understand here is whether it’s a refinance or a purchase these loans are available for both refinance and purchase transactions and it’s all one loan and it’s a first lien position loan. It’s not necessarily a home equity line of credit or a second mortgage. It’s amortized over 30 years. They also have a choice with Fannie Mae Homestyle if they want to do it on a lower term for 15 years and so forth. FHA loans are amortized over that 30-year timeframe.
Adam Small: We’re really not talking about a second mortgage at all here, right? We’re talking about kind of what you see on the home renovation shows where they see three houses and they buy the one that’s in the absolute worse shape and they fix it up at the same time before they actually move into it, right? It’s really just one loan with enough left over to not only cover the cost of the house but fix the home up as well.
Katie Hughes: Right.
Adam Small: That’s what you’re talking about?
Katie Hughes: Yes, exactly, except don’t keep giving us expectations like HGTV because those are still …
Adam Small: Right. Well, you know, that’s a formula, right?
Katie Hughes: Right. Exactly.
Adam Small: Yeah, it’s only going to cost $10,000.00 and you know what? Now, we need to replace all of your electrical wiring and that’s going to be $50,000.00.
Katie Hughes: Right.
Adam Small: Right?
Katie Hughes: Right.
Adam Small: Yeah, yeah. But the concept is the same where you buy the home and you get enough left over to, I say left over, enough money to actually fix the home up in the way that you want, whether it’d be just adding an HVAC or doing a complete remodel.
Michael Kerkhof: Thank you, Adam, very much for bringing that up. One of the I would guess is simply a misconception with a lot of the television shows and reality TV shows out there is that individuals can come in, they can renovate these properties, and they can do extensive renovation repairs and it only costs $25,000.00. That’s pretty much a big misconception because a lot of these television shows have budgets, they have production budgets, what have you.
Adam Small: Right.
Michael Kerkhof: You’re not going to be able to repair and put bamboo flooring in 1,500 square feet for $1,800.00. That’s just not going to work.
Adam Small: I wish it did though …
Michael Kerkhof: We all wish it did.
Adam Small: … you know. That’d be amazing, right?
Michael Kerkhof: That would be great and our clients would be thrilled. Our contractors would probably beat us with a stick, but other than that. I mean, that’s one of the misconceptions that certainly is out there. We always set that expectation for our clients just to be aware and know what are the means within their budget. That way everyone’s on the same page. More specific, whether it’s our realtor referral partners, our specific buyers, our contractors as well, they’re getting a better understanding of what that customer’s needs and wants are, and that’s where we continually have our focal point.
Adam Small: Great.
Kimberly Small: You work with the customer to make sure that they have a contingency fee or contingency amount in place for unexpected things within the renovation?
Michael Kerkhof: Absolutely, and thanks for bringing that up as well, Kimberly. One of the things with these loans is they are always set with a specific contingency reserve for repairs that are just simply unforeseen. Whether they’re coming in to redo flooring, they find out the subflooring is in disrepair and needs to be completely replaced, that’s what that contingency reserve is for. Ironically enough, the contingency can also be used for repairs that they did not include in the bid and they want to also utilize those funds as well. If they don’t use the contingency reserve, where does that money go? Well, it certainly doesn’t just disappear. It’s actually going to be a principal reduction on their actual loan if it is not used.
Adam Small: They don’t get to just pocket it?
Michael Kerkhof: They can’t pocket it. Boy, that would be nice if they could. No, that goes directly to a principal, what’s called a principal reduction.
Adam Small: Right.
Michael Kerkhof: Now, there are other fees that are associated with any renovation loan. Those fees are and can be of course financed into the overall package. Those typical fees are going to be any type of title update fees, appraisal inspection fees if needed, consultant inspection fees, as well as any consultant fees thereto as well.
Kimberly Small: Is an inspection required in order to do a renovation loan?
Michael Kerkhof: Absolutely.
Kimberly Small: Okay.
Michael Kerkhof: Several inspections can be done. That is just primarily the watchdog from a consultant standpoint of is the workflow being completed and being completed in a workmanship-like fashion. That’s what those inspections are designed for.
Kimberly Small: So, you have parameters in place to help guide the process and make sure that there’s not a giant red flag in the property basically, that something big wasn’t disclosed and the homeowners didn’t know about?
Michael Kerkhof: Absolutely. That’s one of the things as well as when we … The due diligence that’s conducted on the entire process with these loans appraisal-wise, consultants for any of those larger projects are for that specific reason.
Kimberly Small: Okay. You had mentioned home equity loans as well. What would make a difference as far as, or are there other types of loans that somebody doing a renovation should consider as opposed to doing a renovation loan?
Katie Hughes: The main difference between the two products, really with the renovation loan you are replacing your first mortgage and then with a home equity it would be considered a second mortgage. The benefit with doing the renovation loan would be if you’re doing larger renovations. It’s going to allow us to go in and really gut the house. If you need a new HVAC and you already own the home, it may not be beneficial to do the renovation loan, then you can look at doing a second mortgage or a home equity line of credit. Another benefit would be that the renovation loan is amortized over 30 years, so you have longer to pay it, which means lower payment, which might be more comfortable for you versus the home equity products which are going to be 10, 15, maybe 20 on the high end.
Adam Small: Right. You know, along those lines you just kind of said if you’re just getting your air conditioner replaced or something like that you probably don’t want to go with a home renovation loan, so who else might not be a good candidate? What other situations might not make you a good candidate for this type of loan as opposed to maybe a home equity or something like that?
Michael Kerkhof: I would have to say it’s based really on that individual. If they’re doing, of course, minor repairs to that extent, whether “Hey, we need to replace a water softener,” or “We didn’t need a full HVAC repair and bottom line it comes out to about $4,000.00 in overall costs,” a renovation loan’s just simply not a good fit for that just with the expense that’s going to come out for those repairs. Any individual that is, I guess would understand the fact that they are going to have contractors in their home for a short period of time.
Adam Small: Right.
Michael Kerkhof: If that’s a privacy problem, a renovation loan is the not for them because they’re going to have contractors in and out of the property.
Adam Small: Somebody’s going to be in that house, right?
Michael Kerkhof: Exactly. That’s why it is imperative that a solid relationship with the contractor is established, of course and that is always the goal as we try to do that.
Katie Hughes: I think it’s been described as a short-term marriage before, so.
Michael Kerkhof: I would say short-term marriage is probably the best way to describe it because here you can only, I guess, put yourself in that position to where you’re coming home from work, you don’t have countertops, how are going to feed the kids tonight, are we doing pizza again, and Bob’s underneath the sink making all sorts of noise and whatever that may be. Those are considerations that need to [inaudible 00:13:47].
Adam Small: A few choice words too.
Michael Kerkhof: Right. Precisely. One of the things as I explain this, especially when I get a customer that’s doing an extensive build out, it’s kind of like that movie the Money Pit. You know, the end result?
Adam Small: Oh, yeah. Yeah.
Michael Kerkhof: And the end result is there, but boy it was hysterical getting there.
Adam Small: Not at the time though.
Michael Kerkhof: Not at the time, but, boy, at the end it was well worth the …
Adam Small: Right.
Michael Kerkhof: … well worth the project.
Kimberly Small: Well, and just to piggyback off that, when somebody buys a new home and they have these big dreams of what it’s going to look like if they’re planning to renovate or expand there are some considerations that they really need to think about. For instance, are they in a neighborhood where there’s a homeowners association and are they going to stop anything that they’re trying to do, or are they going to get permitted by the city for any extensions or those types of things. Is that something that you guys help with as well or do they need to come armed with all of that information before even talking to you?
Michael Kerkhof: Absolutely, Kimberly. That brings up a lot of validity. Permits are going to be required on specific jobs. Literally every county in the state has a list of certain permits because it is county-related. We require those permits to be noted within the bid and also those permits be pulled before work can begin after the fact. That’s one thing our renovation team establishes once we actually close the loan itself.
Michael Kerkhof: Homeowners association approval. It’s imperative that the new buyer make sure that the association doesn’t have specific requirements that are going to need approval through that homeowners association. Any kind of exterior painting, specific shingles on a property, there are some associations that have certain requirements that the homeowners within that neighborhood or that PUD, which it’s called, or a planned unit development, is going to require. They can’t come in and obviously paint a house a very light pink with, you know, some mauve shutters or whatever that may be.
Adam Small: Right. Right. Right.
Michael Kerkhof: They’re going to have to follow some specific rules.
Kimberly Small: Let’s talk about the scenario that someone gets a renovation loan and they have a contingency in place but either they realize throughout the process that their tastes are a little bit more expensive than they originally thought or they find something that despite having an inspection shows up that requires being addressed and there’s not enough funds. How are those situations handled?
Michael Kerkhof: It’s always better to have that budgeted upfront because a scenario works in this instance anytime. If there’s an overage in contingency, those funds have to come from the individual borrower, so that is a big difference there. They need to make sure that they have ample funds, that they’re contractor has bidded ample funds that are available for any repair, especially if they’re doing some extensive, you know, either higher-end items, so whether it’s that granite countertop compared to something that’s a little different that’s thousands of dollars more. It’s much more recommended that they have that at the higher end prior to close than having to come out of pocket to do so.
Adam Small: So, they should, if they’re going to fudge the numbers, fudge them higher than lower?
Michael Kerkhof: Exactly, or as far as the budget is concerned they want to make sure that they budgeted ample funds …
Adam Small: Right.
Michael Kerkhof: … for the project itself and even on that higher end because, I mean, the bottom line is that it comes down to it. If those funds aren’t used, they can be used for something else that wasn’t on the project. As I go and I talk to customers it’s like, “Hey, we budgeted $15,000.00 for this kitchen repair,” which is usually that’s a pretty good figure on an extensive, high-end kitchen remodel with some of the smaller homes. It’s like, “Hey, but we had an extra four grand that’s let here.” Blow out and put a beautiful deck on the home. That’s some of the things that you’re going to be entertaining.
Adam Small: Right.
Michael Kerkhof: You know, those are some of the items that I always like to share with our borrowers just to make sure that they understand and it’s meeting that expectation and it’s like, “Okay, now I know how this works and I’m not confused. I don’t want to put myself in a trap.” There’s nothing worse than having that scenario …
Adam Small: Yeah.
Michael Kerkhof: … or making that phone call. You guys have to pony up $3,000.00 or work with your contractor.
Adam Small: Right.
Kimberly Small: Right.
Adam Small: Right.
Kimberly Small: As you mentioned earlier, if they are under budget that can go towards principal as well instead of another project.
Michael Kerkhof: Absolutely.
Kimberly Small: Okay.
Michael Kerkhof: Absolutely.
Adam Small: Cool. Do you have any suggestions for real estate agents that are working with clients that want to buy a property that requires a renovation? Or maybe even they’re selling the listing as well?
Katie Hughes: Well, realtors can really integrate this into their business model and develop their network in the right way. Networking with the right lender, contractor, and consultant is key to allowing this process to become successful. As we mentioned, it’s a short-term marriage. Communication is key in marriage, so communication is going to be key with this realtor, with understanding, because they might have that little bit of a deeper relationship with the borrower.
Adam Small: Right.
Katie Hughes: Letting us know if that anxiety is starting to get high so then we can all just keep everybody on track. That’s really important.
Adam Small: So, really sounds like a get-to-know-me sort of thing, right? You know, …
Katie Hughes: Absolutely.
Adam Small: … reach out and talk to renovation loan specialists and know who they are that way when they do come across a client that wants to do this whether they’re buying or selling they can go, “Oh, you know, I’ve got the perfect person for you to talk to.”
Katie Hughes: Exactly. It’s a matchmaking scenario.
Adam Small: Right. Right. Right. Okay, great. Before we wrap up, you guys have any other thing that you want to talk about or any other misconceptions you want to talk about?
Michael Kerkhof: I would say one of the more, I’d say misunderstandings and misconceptions is these loans have literally gotten a bad wrap over the course of years. The reason I bring that up is because several different companies tried to get into the renovation business marketplace. They didn’t have certain divisions or enough education for their loan officers to do so, so they got this more of a reputation that they took very long to close, they never close, contractors are difficult to deal with. That is a big misunderstanding. You know, one of the things is timeframe for closing certainly, depending upon the extent of the project, we want to have ample timeframe so everybody is, again, on the same playing field to get it closed, but in hindsight from a contracting standpoint, you know, these funds are held in escrow. The money’s not going anywhere, so the contractor simply has to do their job.
Adam Small: Right.
Michael Kerkhof: I don’t know in their right mind what contractor wouldn’t want to jump on this train. You know? You know, so, that’s another one of the misconceptions that come out there. Kind of piggybacking to the question that Katie answered as well, we like to establish that with our referral partners and network, and I think the biggest key is just the simplicity of educating everybody and setting everybody’s expectations so everybody knows.
Adam Small: Okay.
Katie Hughes: Another misconception is that we have a list of contractors that you have to use. That’s not true. You can use your own contractor. If you have that relationship, we prefer that, and then they have to go through a process of being validated with us. That’s included in the timeframe that we give you, so it’s not above and beyond the timeframe that we would set that expectation; it would be included in that.
Adam Small: Okay.
Kimberly Small: That’s the same with anything. The homeowner ultimately has the choice of where they go for their realtor, their mortgage, their contractor, and all of those things, but it helps to have that relationship with those types of people, both mortgage agents and real estate agents, knowing people that will give good testimonials, that they have good testimonials and a good track record, that they can refer to their clients if they don’t already have somebody.
Katie Hughes: Absolutely.
Adam Small: All right. All right, guys, so anything else before we wrap it up? No? Okay. Great. Well, thank you so much for listening to the Real Estate Marketing Minute. Thank you guys, Katie and Michael, for being with us today.
Katie Hughes: Thank you.
Adam Small: We do appreciate it. We’ll see you next time.
Michael Kerkhof: Yeah, thank you both very much.