This article first appeared in Credit Union Times.
Evolving competitors and increasing home costs have created some lending challenges for credit unions. At the same time, digital advancement and access to instant information has made applying for loans easier and faster for consumers. Though today’s loan market has created some hurdles, there are opportunities for growth inherent in this evolving marketplace. Various trends among today’s homeowners can be leveraged by credit unions to overcome market challenges and continue driving loans and membership.
As reported by The Mortgage Reports, home interest rates hit an all-time low in September, which has increased the demand and cost of homes. As such, many consumers are seeking to renovate and remodel homes they are currently in instead of purchasing a new home. This growing trend has driven the demand for financial support for these home improvement projects.
There are a few solutions a credit union can provide to members to finance their home improvement projects. Leveraging any one of these solutions can help credit unions maintain a competitive edge in today’s marketplace, while balancing the risk and reward for credit unions and their members.
Home Equity Loans and HELOCs
An increasing number of homeowners are looking to leverage home equity loans to finance their home improvement projects, rather than refinancing their primary mortgages and subsequently losing their rock-bottom rates. If you choose to offer these loans, you want to ensure that your home equity guidelines are attractive to potential borrowers, so that your credit union maintains a competitive edge in today’s marketplace.
For one, your credit union may want to consider lending up to 100% loan to value, rather than the industry standard of 80%. Borrowers are extremely attracted to this type of loan because they are able to obtain these additional funds without the expensive burden of private mortgage insurance. By making this change, borrowers who are equity thin but credit worthy can obtain the money they need, while credit unions continue to add as much as 15% to 30% more loans to their portfolio, according to 2019 data pulled from Allied Solutions’ home equity clients.
Broadening underwriting guidelines to approve more prime and near-prime loans is another great way to expand home equity opportunities. Making this strategic move can expand your portfolio, while sticking to a less-risky pool of borrowers. Credit unions can also adopt default or equity protection solutions to reduce any potential risk associated with these expanded loan opportunities.
Alternative Home Improvement Loans
Offering home improvement financing options can provide alternative funding options for home improvement projects, thereby allowing homeowners to more quickly expand their budget and make better improvements than they could have afforded out-of-pocket. As an example, LendKey offers a home improvement financing solution that fills the gap between a HELOC and credit card, thereby eliminating the need for the borrower to open or increase a line of credit or personal loan, which often carry a much higher interest rate.
Home improvement financing solutions can significantly expand a credit union’s loan opportunities by providing access to prime homeowners from all corners of the nation via a national network of contractors. Providing financing options through community contractors can also help with the financial needs of homeowners in a credit union’s community while at the same time supporting the local economy. Additionally, these loans can help to diversify opportunities geographically, which can help spread out economic and disaster-related risks that may exist in a credit union’s loan portfolio.
Home improvement loans can open the door to a more diversified loan portfolio and drive new loan opportunities to your credit union. These loan alternatives can also help credit unions quickly and cost-effectively deploy capital, diversify earnings and generate a healthy return in a high-performing asset class of prime borrowers.
"Green" Home Improvements
Consumers are driving the demand for energy-efficient homes. A September 2017 report published by the Rocky Mountain Institute stated consumers are willing to pay more for energy-efficient homes, especially millennials. In fact, 10% of millennials involved in this report said that they rank energy efficiency as a top priority when choosing a home to purchase. To support these sustainable practices, many state governments and utility companies now offer financial incentives to property owners leveraging energy-efficient materials, designs or construction practices in their home construction and renovation projects. These incentives have increased the popularity of green practices among homeowners.
However, the government offers no centralized database of green incentive programs. To help homeowners and mortgage lenders capitalize on these opportunities, New Vista Solutions created The Green Report so that homeowners could access a comprehensive list of government-backed and utility-funded “green” financial incentives available in their area.
Credit unions can leverage this tool to pull in new loan opportunities from existing members with tappable equity in their homes, new members looking to finance home renovations, and new or existing members interested in green upgrades, renovations or construction projects on their home. By providing members with information that can help them choose the right financial product for their green projects, credit unions can also take on the role of trusted advisor to property-owning members.
Additionally, promoting these green incentives can help credit unions lower their portfolio risk. There is growing evidence that suggests green buildings and their occupants may face a lower risk of default. Green buildings typically cost less to occupy due to lower utility bills, which puts the property owner in a more stable financial position. Green buildings also tend to have a higher market value than non-green buildings – resulting in a healthier loan-to-value ratio.
For these reasons, leveraging tools like New Vista’s Green Report to advocate for green practices can lower a credit union’s portfolio risks, while at the same time strengthening relationships with new and existing members.
It is crucial that credit unions continue to keep a finger on the pulse of the market and leverage new home loan trends like these as home costs and competitors continue to disrupt traditional lending strategies. Offering diverse home improvement financing options can help your institution more quickly deploy capital, increase return on assets, grow your portfolio and increase loan yield, all while pulling in opportunities from retail loan programs and other emerging competitors.
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