Renovation: A Path to Fair Lending 


Think the Community Reinvestment Act’s (CRA’s) focus on measuring how many loans are made to underserved, largely low- and moderate-income communities does not apply to nonbanks? Think again. While that’s true of the federal law, at least three states have passed CRA-like laws that apply to nonbanks, and the Mortgage Bankers Association (MBA) predicts more states could follow suit.

New York recently became the third state to expand CRA mandates – Massachusetts and Illinois are the others. 

Meeting the new requirements via renovation home loans can provide triple benefits:

  • Renovation loans tackle two significant challenges facing today’s homebuyers: rising prices and fierce competition for scarce listings.
  • Communities gain revitalized housing and increase the tax base.
  • Lenders grow purchase and refinance volume while meeting CRA-like rules.

How many homebuyers are stuck in your pre-approval workflow for months because they keep getting outbid? Renovation lending can help move those buyers off the sidelines and into a home. That’s because homes for sale in need of modernization typically see fewer offers, although some attract offers from cash-rich real estate investors looking for flip targets. 

Borrowers struggling to buy a home due partly to rising home prices may benefit from combining a renovation loan with more flexible underwriting guidelines offered by FHA, Freddie Mac and Fannie Mae. Community seconds, grants and down payment assistance also can come into play. Because renovation loans are based on as-repaired values, combined loan-to-value ratios (LTVs) as high as 105% occur with Home Possible CHOICERenovation loans or Fannie Mae Home Ready HomeStyle and requires Fannie Mae/Freddie Mac-approved home ownership counseling. That extra LTV bump may be just enough to boost a buyer over the affordability hump.  

Lenders seeking new ways to replace lost refinance volume can use renovation lending to grow their business via retail or correspondent markets, improve the communities they serve, and meet state-level CRA-like requirements.

Building FHA 203(k) Business

Many lenders have already successfully used the FHA’s 203(k) as a primary program to rehabilitate or repair one- to four-family homes. It promotes the restoration and preservation of existing housing stock, making it an important tool for community revitalization. It can also expand homeownership. The lack of housing stock (and the rising costs of available houses) especially challenges people with lower credit scores and smaller down payments, the population FHA is intended to serve. 

Nonbanks can also consider partnering with nonprofits and state or local housing agencies to rehabilitate homes. These groups can combine 203(k) loans with other financial resources to help borrowers realize homeownership. 

Other features and programs such as FHA’s Opportunity Zone Limited 203(k), Fannie Mae’s HomeReady®, HomeStyle and Freddie Mac’s Home Possible CHOICERenovation also have the potential to meet CRA-like regulations or to simply expand lenders’ affordable housing options. 

There is a learning curve to originating 203(k) loans, but with the shift in the market, making an effort and committing the resources required will be worth the effort. The key to mastering these loan programs is learning how to pull together the renovation plan and budget to unlock the power of lending against the “as repaired” value of a home. 

These loans are not open-ended equity lines. They are fully disbursed first mortgages with a repair escrow holdback for repairs and improvements. These loans are insured immediately after closing and before the work is completed. The lender disburses the funds as work is completed, usually within six months. Typically, building permits are required for all work. The goal is to complete the project quickly and minimize renovation risks for everyone involved.

The 203(k) loan is an excellent way for nonbank lenders to demonstrate commitment to lending to low- to moderate-income people and communities and to meet state CRA-like requirements. 

A robust secondary market for 203(k) mortgages has developed over the last few years. Many of these investors will help originating lenders develop a successful 203(k) program. 

Rather than viewing the trend toward requiring nonbanks to meet CRA-like goals as a negative, serving underserved populations and communities can deliver triple-bottom-line results. Through renovation lending, lenders can improve the housing stock of the communities they serve, help people gain a foothold on the homeownership ladder and generate mortgage volume that is not interest rate driven. 

Jim Bopp is vice president of national renovation lending, Planet Home Lending.

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