By Ray Birch
PHILADELPHIA—With the COVID-19 pandemic keeping people home, more consumers are considering renovating their house, and Ardent Credit Union has responded with unique remodeling loan.
Ardent Credit Union has introduced its new Renovation Loan in partnership with Philadelphia-based financial technology company RenoFi. Unlike a traditional home equity loan that calculates available equity based on a home’s current value, the CU’s new product allows homeowners to borrow against their home’s after-renovation value, up to 110% of the home’s current value.
“This unique product fills a need that isn’t being met with traditional home improvement financing options,” said Rob Werner, president and CEO of Ardent Credit Union.
Werner told CUToday.info the $785-million CU’s new loan meets the needs of homeowners who want to renovate their current residence, but have limited equity in their house. The loan offers a two-year draw period that turns into a fixed-rate term loan.
“Our loan is much more flexible and affordable than a typical construction loan,” Werner told CUToday.info, noting that with construction loans contractors have to complete a lot of paperwork and make their own draws. “This loan does not have those restrictions.”
Werner said homeowners control the money distribution and that accessing the funds is simple, just like a standard line of credit.
Most Attractive Feature
What makes the product most attractive, however, according to Werner—and it’s a feature that extends Ardent Credit Union’s market for renovation loans–is homeowners don’t have to wait to build equity in their homes before they can get any money out to renovate.
“That means they live for years in homes that don’t work for them. Or, homeowners may decide to tackle their wish list piecemeal, which increases renovation costs and has them living in a continual construction zone,” he said. “The most desperate homeowners may decide they can’t wait and make risky financial decisions, such as dipping into their emergency funds, draining their retirement savings or taking out high-interest unsecured personal loans. Even construction loans are not optimal since they can result in higher rates with lots of closing costs.”
Werner said the Philadelphia market is a good fit for the Renovation Loan, as the average age of a house in the market is 60 years.
According to Werner, the coronavirus pandemic os not only keeping people at home, where they are able to see the need for remodeling projects, it also has consumers wary about venturing out to consider buying another home. Both trends are driving up the need for remodeling loans, he said.
“We would like to see maybe $40 to $50 million in these loans booked in a year,” said Werner.
Ardent is the first financial institution to offer the RenoFi product, stated Werner, who said the credit union has been piloting the loan for more than a year.
Up in a Down Market
“It has done really well, and now even better during the pandemic,” he said. “We have booked more than 20 loans so far during the pilot program, and all have been for borrowers with excellent credit.
“We are a credit union that is lending driven,” Werner continued. “It's not as much about growing assets as it's about growing the loan portfolio. So every year in the strategic planning process we discuss what else we can do to continue to grow the loan portfolio in a very competitive marketplace.
“If you go back a little over a year-and-a-half ago, the economy was still fairly strong. There was talk about small signs of a recession coming, there was a bit weakness in the economy, so we thought having real estate-based assets was probably better than other assets. Quite honestly, we’re just adding another product in the marketplace.”
Werner emphasized that not only does the loan offer financing advantages over a typical construction loan and home equity line of credit, it’s easier to manage the remodeling project with the help of RenoFi.
Rob Werner
How Third Party is Paid
He said in the Philadelphia marketplace homeowners often have to take a construction loan, on which there are draws made by contractors, more inspections, and is a “cumbersome process.”
“RenoFi provides a concierge level of service, where they go out and identify potential folks to do renovation loan, they work with the homeowner, they assist with finding contractors, they look at the remodeling contract, they conduct a feasibility analysis of the project and assist in vetting the contractor—they basically guide homeowners through the process.”
The cost for the loan that is brought to Ardent through RenoFi, explained Werner, is the price for the “services” RenoFi delivers to the borrower.
“We pay RenoFi for each of services that they perform, almost like a laundry list,” said Werner. “If they provide assistance with contractors, for example, we pay for that service. There is a set dollar amount for each service,” added Werner, who did not disclose the various price tags. “But we cover those costs, and we don’t pass them on to the member.”
Loan Pricing
Werner said the loan rate can vary from the a low of 4% into the 5% range, based on borrowers’ credit.
He added that the credit union is now charging a “nominal fee” of less than $100 per month to the borrower to provide some incentive to keep the project moving.
“We don’t want them taking the money and then the project sits around for a year,” he said.
Although the draw period is two years, getting the remodeling project completed expeditiously is an important to the success of the new loan, emphasized Werner.
He noted that once the project is done the loan-to-value returns to traditional levels, below 100%.
“We have seen all of these projects we have loaned money for completed in about three months or less,” said Werner. “Really, the value in the home comes back very quickly.”
The Key
That’s key, as Werner said the credit union recognizes the additional risk from a home improvement loan allows for equity above the home’s appraisal.
“We thought this loan offers an acceptable level of risk, because typically these projects are completed fairly quickly,” Werner said. “And we don’t think anyone will try to scam us—like take the money and go buy a car—because they first have to work with contractors, get bids, have architectural documents developed. That’s a lot to go through to pull off fraud.”