A new mortgage product is about to hit the market that could make it easier for owners to repair or rebuild homes that have been damaged or destroyed in floods, tornadoes, hurricanes and other natural disasters.
Dubbed the CHOICERenovation loan, it also will allow buyers to purchase older houses that need some work and, therefore, may be more affordable than newer places.
Four out of every five of America’s 137 million single-family properties are at least 20 years old. But the average age of the country’s housing stock is 42, according to the Urban Institute. That means the typical American home was built in 1977.
Houses with some years on them often need upgrading -- a new kitchen with the latest appliances, perhaps, or a remodeled bathroom with new fixtures and plumbing. Maybe a new roof. That’s why older places tend to languish on the market. People prefer to move into houses that are ready for occupancy without having to do too much to them.
The new loan from Freddie Mac will allow adventuresome buyers to roll the costs of necessary improvements into the loan amount. Better yet, they won’t have to do the work until after they move in. And they can act as their own contractors, as long as they demonstrate that they have the ability.
Freddie Mac doesn’t originate mortgages directly. Rather, it keeps the funds flowing for mortgages by buying loans from some 2,000 lenders nationwide, which borrowers deal with directly. And whenever the secondary market company tells lender-clients it will purchase certain loans that meet its criteria, the product usually becomes available to consumers in short order.
Freddie Mac just rolled out the loan earlier this week, so it will be a few more weeks before it becomes available. But when it does, Danny Gardner, Freddie’s senior vice president for single-family affordable lending, expects it to be a big hit because it addresses so many needs. It’s a multifaceted tool for lenders to keep in their arsenal, he said.
Most importantly, perhaps, CHOICERenovation will make the aging housing stock more attractive to first-time buyers. “There’s a fair amount of housing with deferred maintenance,” Gardner said in an interview. Cash-strapped buyers “should be very willing to undertake those issues if they can get houses at an affordable price.”
Because it can be used as a no-cash-out refinancing tool, the loan also targets current owners who are looking to stay put but need to remodel, seniors who need to renovate so they can age in place, and families who need to redo their places to accommodate aging relatives.
Similar mortgages are available through the Federal Housing Administration, the government agency that insures mortgages on behalf of lenders, and through Fannie Mae, Freddie Mac’s chief rival in the after-market. Both Freddie and Fannie pool the loans they buy into securities and sell them to investors worldwide.
One advantage of this type of loan is that it allows borrowers to finance both the purchase price and the renovation costs all in one loan and with just one closing. When two separate loans are involved, there also are two closings, which can be expensive, depending on where the property is located.
According to the latest data from ClosingCorp, settlement fees range from nearly 5 percent in Pennsylvania to less than 1 percent in Nebraska. The fees are based on the sales price and tax rates imposed by local jurisdictions, and include property taxes, title insurance, appraisals, recording fees, land surveys and transfer taxes.
Affordability and a shrinking inventory of houses for sale are probably the two biggest hurdles today’s buyers must overcome. As a result, there has been a huge surge in the renovation sector. Rookies have been forced to choose between buying houses that need some rehabbing or remaining renters, and potential move-up or move-down buyers have decided to stay put and improve their places rather than settle for something that doesn’t meet their needs and desires.
Since the Great Recession ended in 2009, the renovation market has more than doubled. According to the Joint Center for Housing Studies at Harvard University, the home improvement and repairs sector is now a $400 billion industry.
But what really sets the Freddie Mac offering apart is that it allows people to repair homes damaged in a natural disaster -- or better yet, prepare them for future disasters. Borrowers can use the proceeds on such items as surge barriers, foundation retrofitting for earthquakes, or retaining walls.
If a property has already sustained damage, its owner can use the loan to rebuild it so that it complies with all current applicable state and local laws, including zoning requirements.
Thousands of homes are lost every year to disaster, thousands more are lost to obsolescence, and even more could be upgraded to better survive a disaster.
Eligible properties for the new loan include manufactured houses as well as site-built, single-family houses. However, Freddie won’t deal with lenders that cannot exhibit some expertise in rehab lending.