Low housing inventory? Reno to the rescue
There has been one constant refrain when talking about the housing market over the last few years—low inventory. There have been fewer homes for sale than buyers in the market for at least 3 years. This stubborn problem has been present since before the pandemic started, was exacerbated by the historically-low mortgage rates of 2020 and 2021 and persists even today, when rates have gone back up.
Low inventory is throwing a wrench in many a homebuyer’s plans. As the chief economist of the National Association of Realtors®, Lawrence Yun, says, “One cannot buy what is not for sale.”
But never fear—renovation loans offer unique and timely benefits to both potential homebuyers as well as current homeowners. Below we explore the current market, as well as the ways a renovation loan can help those looking to purchase or refinance.
Housing inventory: Historically low levels
While trending downward for the last couple years, inventory levels are now so low that experts predict that it will be at least two more years until we get back to pre-pandemic inventory levels. The nation’s inventory of homes for sale fell 9.5% annually to 950,000 units for sale at the end of March, which marks the lowest March inventory figure ever. And that actually is up from February 2022.
How it affects first-time homebuyers
While low inventory drives up demand (and prices) across the entire real estate market, the trend is especially harmful to first-time homebuyers. The national median price for a home in 2019 was just in the range that many first-timers consider doable, but look what’s happened over the last 4 years:
Add to those rising prices that mortgage rates are going up, the monthly hit your budget take by your mortgage payment could be hundreds of dollars more.
Inventory and coronavirus
The trend also doesn’t seem likely to change with the start of the summer market. Many sellers are taking a wait-and-see approach right now, knowing that they can probably realize a big return on their investment, but also knowing that selling their home will also make them buyers in this crazy market. This likely means low inventory is here to stay for a while.
Renovation to the rescue!
While stubbornly low inventory is driving up demand in many markets, renovation loans offer potential homebuyers flexibility and new purchasing options. By including the cost of renovations into your mortgage, you can widen the number of homes you might be looking at, allowing you to purchase a fixer-upper that matches your price point or where you want to live.
Existing homeowners can also take advantage of renovation loans, and take advantage of a cash-out refinance or home equity line of credit (HELOC) to make improvements to their home, adding space, reworking current spaces and overall just making your home more livable. You can also make your home more energy efficient, lower utility bills, and potentially increase property value.
How to get started
Whether your renovation plans consist of shopping for a fixer-upper or renovating what you already own, you’ll want to be sure to work with a loan specialist that has extensive experience with renovations. They’ll be able to help ensure your financing—and the ensuing construction project—runs as smoothly as possible.
Our specialists will be able to walk you through the process, but it will generally include the following steps:
- Getting pre-approved so you know the exact budget
- Finding a property (if you’re moving)
- Making an offer
- Meeting with a HUD Consultant/Contractor to conduct a project review and decide on repairs/potential projects
- Obtaining contractor bids—can include working with architects, designers or engineers
- Ordering your appraisal
- Underwriting—reviewing your appraisal and final renovation budget with your Renovation Specialist to prepare for closing
- Closing—receive, review, sign and return your Closing Disclosure
- Renovating! This includes figuring out a schedule for paying your contractors
- Walking through your final inspection to ensure all repairs have been completed and the building is up to code
Know your reno loan options
There are also a variety of renovation loans to meet each buyer’s specific needs. Some options include:
- Fannie Mae HomeStyle Renovation Loan: Offers a wide range of renovation projects—from needed repairs to luxury upgrades—and can be used when purchasing a new home. It also allows you to borrow against the future value of your home.
- FHA 203k: The Federal Housing Administration (FHA’s) loan includes standard and limited options as well as a refinance option, and also can be used when purchasing. These types of loans are specifically to be used while working with a contractor.
- A Home Equity Line of Credit (HELOC) allows current homeowners to pull a line of credit from their home equity for a set timeframe. You are able to draw funds as needed with competitive interest rates.
- Cash-out refinance*: Allows you to refinance your current mortgage for more than the amount owed—taking the difference in cash—which can be used for a variety of things, including renovations.
Working with a loan officer will ensure you can select the best option that correlates with your renovation plans—whether they include finding a new home or updating your current home. Though current conditions might be constrained by low inventory, renovation loans can help you envision a home’s true potential and transform any house into your dream home.
Disclaimer
*Using funds from a Cash-out Refinance to consolidate debt may result in the debt taking longer to pay off as it will be combined with borrower’s mortgage principle amount and will be paid off over the full loan term. Contact Guaranteed Rate Affinity for more information.
Guaranteed Rate Affinity is a private corporation organized under the laws of the State of Delaware. It has no affiliation with the US Department of Housing and Urban Development, the US Department of Veterans Affairs, the US Department of Agriculture or any other government agency.