April 6, 2018

As designers and contractors, we are not fully serving our clients and may be missing sales opportunities if we do not understand and suggest financing options to our clients. Most finance experts agree that when you offer financing options to your clients, you can boost sales, improve customer loyalty and build repeat clientele.

This article will help you understand common financing options available, from your client working directly with a lender, to new concepts in our industry, such as point-of-sale credit and your business internally financing a project. When you network with finance experts and you offer full service to your clients, you may help your client change from, “I’ll think about it” to “Yes, you are hired!”

Non-Borrowing Options
If you client has enough cash in a savings account or stuffed into their mattress, no financing is needed. Receiving cash from friends and family may be an option, but there are often strings attached. Smaller projects can be funded by cash, but larger projects need to be financed. One general business rule that applies is to always use someone else’s money and keep your cash for a rainy day.

• Grants and Insurance. Some clients may be eligible for grants that are awarded because of an injury in the line of job service, such as from the Veterans Administration. Those can also be awarded through an insurance claim from Workers’ Compensation or another auto or body injury claim. Often these funds are a one-time opportunity or have a lifetime cap. Some government programs – typically Medicaid and Block-Grants – and non-profit organizations offer assistance grants, so it may be worthwhile to investigate all possibilities. Be aware that grant approval and making cash available may take a long time.
• Crowd Funding and Charitable Donations. With the popularity and unpredictable success of online services, accessing money through donations is also an option. There are always “angels” and philanthropists to fund human-interest stories and projects. Understand the requirements for funding through these methods.

Borrowing – Non-Mortgage Options
If your client would like to avoid using cash reserves and grants or donations are not possible, they will need to borrow money without a mortgage and repay the loan. Some options are based solely on your client’s credit-worthiness.

• Credit Cards. These can be a quick source of funding, especially for smaller projects. Because they limit the amount available, even for the most credit-worthy borrower, there may not be enough cash available. The interest rates are often substantially higher that other borrowing options, and rates can be variable and not tax deductible. Plus, this type of financing may prevent the client from day-to-day use of their cards if they reach their limits. Businesses that accept credit cards for payments during the project find them beneficial for instant financing of project upgrades (a less-stressful term than change orders). You pay percentage fees for accepting credit cards and will need to adjust your overall or specific sales pricing.
• Point-of-Sale Consumer Credit. Instead of your clients using their credit cards, you work with a lender under a pre-arranged system of the lender approving buyers within minutes, and you typically pay no fees. The sale is closed quickly, often in minutes, and the project moves forward immediately.
• In-House Financing. This is simple for the client. You finance the project from your own resources, and you collect and keep the interest. However, most contractors and designers have neither the cash available nor the skills necessary to properly determine if the client can repay the loan.
• Signature Loans. Like credit cards, money is available based solely on the borrower’s credit worthiness, and no collateral is required. Interest rates and charges will be higher than on loans that do rely on collateral. Funds borrowed through signature loans also carry a fixed monthly payback, typically over two to five years.
• Collateral Secured Loans. This could be a great option if your client has unique items that can be used as collateral. RVs, classic cars, motorcycles, musical instruments, artwork, etc., can all be used as collateral. The amount of the loan is based on the value of the collateral and requires an appraisal. This may not the best option for larger projects but is an effective way to access funds quickly, and the interest rates are lower than credit cards.
• Insurance and Retirement. Borrowing against a life insurance policy is an option that requires careful planning and many assumptions. Taking money out of retirement savings can have limitations, repayments or penalties.

Borrowing – Second Mortgage Options These are a good option if your clients have equity in their home and do not want to refinance their current first mortgage. In some cases, they may be very happy with their current finance rate and will not want to adjust to current market rates, or they simply may not want to deal with the costs or intensity of a first mortgage refinance. Typically, a new second mortgage will be less expensive and will close faster. The interest on these options may be tax deductible, but as always, have your client check with their tax advisor.

• Home Equity Line of Credit (HELOC). HELOC is a variable-rate loan with a draw period and repayment period. If your client has equity in their home, this type of loan can fund a larger project in a relatively short time. Most HELOCs close faster than a new first mortgage – many in less than two weeks. During the draw period, a client may take up to their credit limit, repay a portion and draw on it again. The loan acts much the same as a credit card, hence the term “Line of Credit” is included in the name. Once the draw period is over, typically five to 10 years, the loan will switch to the repayment period. During this period, the loan converts to a fixed-term loan, and the funds are no longer available to draw. Because this loan is a credit line, most HELOCs have a variable interest rate, but these are typically much lower than credit cards. Be aware of changes in tax law, as the interest on these loans may not be tax deductible. Also, a new appraisal may be needed.
• Home Equity Loan. Home Equity Loans differ from HELOCs in that the rate and term is fixed for the entirety of the loan. There is also no draw functionality. If your client chose this loan, they will be granted a one-time, lump sum for use in conjunction for the project.

• Federal Housing Administration 203K Loan. Like a conventional renovation loan, this will allow for the consideration of the equity you are creating with repair, remodel or renovation. The total loan amount would be limited to 110 percent of the home’s value after improvements are made. All aspects of the renovation are required to be completed within six months of closing.
• Conventional Renovation Loans. Fannie Mae and Freddie Mac offer some options for the financing of energy-efficient additions, as well as home renovations. Although these loans have controls in place for maximum borrowing, they will be based on the “after-improved” value of the home. The value of the desired improvements will be incorporated into the appraiser’s final opinion of value. The total loan amount to your client will be limited to a total of 95 percent of the homes after-improved value for a single-family residence. The total renovation costs are limited to 50 percent of the home’s after-completed value. Loans of this type are beneficial because they have only one closing and one set of closing costs.

Borrowing – Reverse Mortgage
The most popular type of a reverse mortgage is a HECM loan, which is almost in a category by itself. Available to clients age 62 and older, these loans can grant access to a lump sum with a fixed interest rate or with an adjustable rate and a variety of disbursement options which can also help the client improve their monthly cash flow. The biggest advantage for homeowners is that they will not have a monthly mortgage payment. Like other forms of home loan financing, they are responsible for paying their property taxes, homeowner’s insurance and HOA fees.

The home must be single-family home – or two- to four-unit home with one unit occupied by the borrower – or an HUD-approved condominium or manufactured home. The loan amount is based on the youngest borrower’s age, home equity, property value and interest rates. Relieving the homeowner from a monthly obligation of a new loan payment, a reverse mortgage may offer the cash necessary to help finance home modifications. This is a very specialized loan and is not offered by every mortgage lender.

Borrowing – First Mortgage Options
This is an option to choose if there is an opportunity to reduce the current mortgage interest rate. Typically, the monthly payment on a second mortgage will be higher than the monthly cost of having access to the same amount of equity with a new first mortgage due to spreading the payments over 15 or 30 years. Be aware that with the 2017 tax legislation, they may only be able to deduct the first $750,000 of their mortgage debt, down previously from $1,000,000.

• Cash Out Refinancing. If the current mortgage is less than the appraised value, a new mortgage can include cash-out to be used for home improvements. If the current mortgage has a high interest rate, this may be good way to reduce interest and access extra money needed.
• Mortgages with Built-In Renovation Financing. These loans help homeowners complete renovations with a loan amount based on an appraiser’s estimate of what the property future value will be after improvements. This is also an option for homebuyers who purchase properties that need repair. Whether a home purchase or a refinance, this option finances the mortgage and renovations in one loan.
• Construction Loans. For larger projects, such as new builds and scrape and builds, this could be the best option. Sometimes they can be two separate loans –  one loan for funding the construction or renovation project, and the other loan to pay off that construction loan. These loans can be helpful because the total project may last up to 18 months.

Now that you understand the basics of financing options, you can help your client access the money necessary for their projects. You should have in your team of experts not only several lenders but also a combination of accountants, tax professionals and financial planners. It is vital for your client and your business to understand any limitations of the financing your client chooses and that you understand how your project payments may be affected.

By Louie Delaware, Co-Founder of the Living In Place Institute