With the economy in recovery, homeowner confidence is returning and we are seeing a marked increase in remodeling activity. But many homeowners are surprised to find that, even with excellent credit scores and solid incomes, financing options for a major remodeling project are much more limited now. Before the recession, lenders routinely approved loans based upon the projected value of what a home would be worth after remodeling. No more; that lending practice is dead and not likely to return soon.
The new reality is that lenders will not loan against the future value of your home. For most of us, that leaves the Home Equity Line of Credit (HELOC) as the only viable financing vehicle for home improvement projects. So here are a few tips on how to navigate the HELOC process.
1. Shop carefully for the best lender
The amount of equity you can tap is restricted by the lending institution’s Loan to Value ratio (LTV). Most lenders today work with an 80% LTV; meaning the maximum amount of total debt you may secure with your home is limited to 80% of your home’s appraised value. But Federal Credit Unions often have more attractive terms. Recently some of our clients have secured loans with a 90% LTV by joining a Federal Credit Union. Don’t assume that you can’t join; you may be surprised to learn how easy it is to qualify for membership.
2. Put your home’s best face forward
Appraisers are human and subject to the same emotions as the rest of us; they will reward a well-kept home with a higher appraised value. Prepare your home as though you were having an open house to sell it. Remember the three “P” rule: pick-up, put away, and primp. A neat home seems larger and gives the impression of being well maintained. And don’t’ forget the yard – a good cleanup and mulching will go a long way!
3. Brief the appraiser
Meet the appraiser personally and tell him how much you think your house is worth and why. You know the quirks of your home and your neighborhood better than they do. Don’t be shy, but don’t be aggressive; just let them know what your research suggests.
4. Help the appraiser
If you have plans of the house, make a copy for the appraiser. At the least, have a copy of your survey plat available. If you know when your home was built, tell them. Make a list of improvements you’ve made since you purchased the house (descriptions only – not dollars).
5. Challenge the appraisal
If you don’t agree with the appraisal, speak up. Don’t bother if it is a small amount, but if it is significant you should contact your lender and ask how to challenge the appraisal.
6. Phase your renovation
Many of our clients use a strategy I call the Equity Bump. Essentially, this means focusing first on projects that will have a disproportionate impact on the value of the home relative to the value invested. Then the home will re-appraise for more and you can borrow against that increased equity for the next project.
7. Repeat as necessary
I am not an expert in financing, but I deal with it every day on behalf of my clients. Let me know if you would like to have a more in-depth discussion of financing options. I’m glad to help if I can.