The ability to provide financing to homeowners eager to engage your services for home improvements can be a vital differentiator, putting your contracting business on equal footing with national hardware chains and top regional competitors.
For many homeowners, a tactical approach to debt is vital to making home improvements affordable. After all, the total outlay for materials and labor needed for installing new siding, extending a deck, or adding a new bathroom can impede a family’s ability to meet other financial obligations. Without financing, many home-improvement projects must be delayed — sometimes forever.
So it’s important that contractors understand and be able to explain the options their customers have when it comes to financing their home renovations. Refinancing a mortgage or securing a home-equity line of credit may seem the default source of credit for home improvements, but it isn’t the only option, or necessarily the most effective form of credit for the task at hand.
Here’s why you should rethink how you facilitate financing
“The right kind of financing can help homeowners achieve their dreams without ‘breaking the bank,’” says Elena Ionenko, co-founder and operations chief at TurnKey Lender, a leading lending-technology provider. “Contracting businesses that can provide options for financing are helping them seize opportunities — whether the opportunities stem from better interest rates, favorable pricing for materials, or a need to complete work on a particular timeline.”
There’s a reason consumer-oriented building-supply chains like Home Depot and Menards provide branded financing options to consumers, typically in the form of project loans extended and administered by third-party financiers. Simply, it attracts customers who in turn buy their wares and use their subcontracting businesses — customers who might otherwise hesitate to greenlight a home-improvement project.
And it’s absolutely worth the effort. Contractors and subcontractors who can help consumers over financing hurdles are angling for an ever-bigger share of a global home-improvement market valued at $849.3 billion in 2019, and expected to top $1.4 trillion by 2026, according to Brandessence Market Research.
Before providing a run-down on the most dynamic way to help homeowners by providing point-of-sale financing, let’s consider how most consumers secure funding for home-improvement projects right now.
- Credit card(s)
This method has the attraction of simplicity, but you may need to be approved for higher credit limits on the card — or use several cards to get the job done. On the downside, notoriously, is the fact that credit-card rates are high, reflecting the fact that they’re unsecured. That said, some cards offer 0% introductory rates for up to 18 months. If you can pay it all off in the stated introductory period, it can be both a cheap and easy way to secure funds for making home improvements. If you can’t, you could end up regretting the lure of plastic.
- Cash-out refinancing
This calls for refinancing to a new mortgage, resulting in a larger debt than what you have currently. You then pay off the old mortgage, and use excess funds for the home renovations in view — if you like. In effect, the “ready cash” from the refi comes from the home equity you’ve accrued in paying down the first mortgage. This can be an effective technique when you can secure a lower rate of interest, and can allow you to pay off the remaining mortgage more quickly. One thing to know: there will be closing costs, and they will be applied to the whole mortgage amount, not just the funds freed up for home improvement.
- Home-equity loan
This is a loan against the free-and-clear equity you’ve already purchased in your home in the course of paying down a mortgage. This fixed-rate option for funding improvements works best for homeowners who have already built up substantial equity, and wish to make use of that money for large renovations — enough to make the closing costs worthwhile. When secured against a property that has been paid down considerably, lower rates may be available. Interest payments on a home-equity loan (HEL) may also be deductible from taxes.
- Home-equity line of credit
If you can liken a HEL to a mini-mortgage, a home-equity line of credit, or HELOC, functions much like a credit card: you borrow up to a pre-agreed limit, pay it back (all or in part), and have access to the remaining loan balance — which, of course, has to be repaid. Rates are adjustable, but they are only applied to amounts actually borrowed, not the entire limit. Closing costs on HELOCs tend to be nominal.
- FHA 203(k) “rehab” loan
New homeowners looking to finance renovations while securing a first mortgage may be interested in this approach, especially if they have a fixer-upper on their hands. These government-backed loans typically come with lower down payments (as low as 3.5%), and lenders tend to be less strict when it comes to credit scoring — a score of 620 should do the trick. That said, funds derived from an FHA loan must be used for home improvements, period.
- Personal loan
Besides credit cards, a personal loan may be attractive to homeowners who can’t draw on equity or provide substantial collateral. These can have high fixed or adjustable rates, flexible (but pre-agreed) repayment periods, and they usually come through pretty quickly. They frequently come into play in emergencies — say, to replace a heating system in the dead of winter.
But there’s another way to extend credit to homeowners looking for your help to improve their homes: you can be the bank.
A new wrinkle on point-of-sale financing
If big-box home-improvement stores don’t use this method (yet) it’s because they’re behind the curve. It’s likely they put in place their point-of-sale financing a decade ago, and since then lending tech and artificial intelligence have advanced to the point where you can operate a secure, efficient and easy-to-use lending platform from a smartphone in the cab of a pickup.
Back in 2010, engaging with a third-party lender, which worked behind the scenes to score, approve, fund, and service loans to make renovations, was just about the only way to go. “Recent advances in financial technology have been stunning,” says TurnKey Lender’s Ionenko. “Our financing platform can be configured to the exact needs of a particular contracting business, and it links to any third-party system software for seamless integration.”
TurnKey lender’s end-to-end automation can be used for home-improvement financing including loan origination, servicing, management, and collection – all within an intelligent integrated solution. Among other benefits to this approach are lightning-fast, AI-aided approvals — a matter of minutes versus days for other types of financing.
In addition to being able to meet your customers’ financing needs, having from-anywhere access to best-in-class means with upgrades provided as they’re developed and approved — and you split financing fees, which you set, with no one.
“What we’re doing for point-of-sale financing is part of a broader fintech revolution that’s changing how we buy, how we invest, and how we get funding where it’s needed,” says Ionenko. “Our solution helps contractors increase sales while helping their customers finance their home improvements in the most straightforward way — a fact that comes into sharp focus for consumers who understand their other, not always so attractive, financing options.”