Common Unique Situations
With housing prices recently hitting stellar highs and only dropping back to affordable prices in
2009, many consumers found themselves looking at used homes and renovating them to be
able to afford home ownership versus renting. This created a problem, however. Banks
traditionally would not consider an improvement financing until the home is owned. On the other
hand, the owner spends all their money to get the house and is then stuck with a home in
disrepair without any further cash to fix it. The whole situation becomes a classic “catch-22.” A
home improvement loan can provide the funds via financing to solve the problem if the home
has sufficient equity to back it up as collateral. However, when home prices dropped in 2009 the
support for this fell out as equity levels fell so low lenders refused any further financing on
homes worth less than their existing mortgages.
If a home is in significant disrepair prior to securing the purchase home loan, many lenders find
themselves in a bind to offer loans. Many mortgage programs only offer permanent financing.
This requires the lender to confirm that the condition and value of the property is appraised at a
high enough value to secure the loan in case of default. As a result, lenders will want the
renovation or improvements to occur first before closing the home loan. This requires a two-step
solution. First, the purchaser needs to seek some short-term financing to pay for the
rehabilitation construction. Once that is completed, and can be verified, then the purchaser can
seek a regular mortgage home loan to both pay back the construction loan and buy the home
outright. Unfortunately, this means that the purchase will also have to deal with a short-term
high interest rate and small window to payback the first loan. |
