Why contractors now want to help fund your kitchen upgrade
Home improvement contractors are making bank.
They’re more likely than ever to offer access to financing to nudge a prospective client over the line for a new kitchen, backyard pool or basement family room. But even as contractors position themselves as conduits for cash, homeowners still need to count the total cost, industry insiders told Straight Arrow.
Homeowners feel cornered by persistently high interest rates, Dave King, executive director of the nonprofit Home Improvement Research Institute (HIRI), told Straight Arrow. Up to 75% of homeowners are planning their next projects, but fewer are willing to pay for improvements with credit cards or home improvement lines of credit, according to HIRI and credit rating agencies.
For homeowners, the shiny vision can be tarnished by the gritty realities of making the numbers work, said Gregg Cantor. He is the CEO of Murray Lampert Design, Build, Remodel, a San Diego firm that manages home improvement projects from complete rebuilds to single-room upgrades.
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When a prospective client’s hopes meet the buzzsaw of their spreadsheet, his staff’s guidance can help. Because the firm has longstanding relationships with several lenders and understands the documentation, lending thresholds and other key metrics that homeowners must achieve to win loan approval, staff can provide a reality check, he said.
For instance, the size of a project can dictate loan terms and cash flow.
“For a construction loan, bank inspections at specified points protect the homeowner and the builder,” said Cantor.
Why are more home contractors offering financing options?
With the cost of construction materials high and erratic, contractors also hope that speeding customer financing will help them gain some measure of control over the budget. Ashley F. Morgan, a bankruptcy and debt lawyer based in Virginia, told Straight Arrow she sees a growing number of stressed clients who became involved with contractors who pressured them into taking out loans to solve the contractors’ own cash flow difficulties.
“Contractors have trouble getting paid, so some of them want to work with lenders,” to lock in the money to cover the project, she said.
Currently, about 4.4% of homeowners finance projects through their contractors, up from 3.4% last year. The rate doubles for those embarking on major renovations, King said. The convenience of accessing funds through a well-connected contractor “provides an avenue to move forward with the project,” he said.
Contractor-assisted lending is picking up even more momentum, with 1,000 contractors using Modernize, a marketing and management platform. A couple of years ago, Modernize added a proprietary app that enables contractors to present clients with offers from several lenders on the spot. Now rolling out nationally, the service is growing at a 10% to 15% annual rate, said Jamie Smith, vice president of homeowner experience and client acquisition.
For the last several years, contractors have sought any edge to win work. Homeowners are not eager to tackle new projects for the foreseeable future, according to a May report from the Harvard Joint Center on Housing, which predicts flat demand for renovations and upgrades.
What is the best way to finance home improvements right now?
Persistently high mortgage rates have squelched enthusiasm for clambering up the property ladder. The same forces, though, play out differently for home improvement: Rising home values appear to validate borrowing from the house to pay to improve the house, but navigating the home improvement loan process is daunting, especially with second mortgages even more expensive than primary home loans. In mid-June, Bankrate listed rates for 30-year mortgages at 6.59%, and a $100,000 home equity line of credit at 7.43%.
At today’s rates, homeowners aren’t interested in refinancing their mortgages to pull out equity for improvements. A report by the St. Louis Federal Reserve Bank tracked the drop in refinancing since 2022 and the corresponding rise in home equity lines of credit, signaling consumers’ interest in alternative sources of lending for their projects. A February analysis by credit rating agency Experian found that 38% of Americans currently hold personal loans. Credible, a lending platform, estimates that 9% of personal loans are used for home improvement projects, with an average of about $21,000.
Personal loans are quicker and easier for homeowners to obtain than home equity lines of credit or second mortgages, according to analysts at the Kroll Bond Rating Agency, and might not require collateral — an important factor for homeowners with less equity.
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Those same factors appeal to lenders, too, who are rushing to make it faster and easier for contractors to sweeten their bids with financing.
Traditional banks like Truist — through its Lightstream division — and the First National Bank of Omaha have set up programs to persuade contractors to convey their loans to homeowners. And some nonbank lenders are offering apps and hardware that enable homeowners to apply for loans right in the backyard where they hope to build a pool.
For contractors, the argument is compelling. They are about 16% more likely to win a major project when they can offer financing, said King of HIRI.
How to avoid hidden risks when financing through a contractor
But it’s still the homeowner on the hook for the loan, said Alexander Katsman, CEO of Credit Booster AI, a digital platform that helps consumers assess their creditworthiness and identify the types of loans that might best fit their needs.
Loan terms and rates vary widely by project, lender and the homeowner’s own creditworthiness, said Cantor. But before wading into specifics, homeowners need to vet the contractor’s relationship with the lender: Are there hidden conflicts of interest, such as a commission paid to the contractor, that could create added pressure to use a certain lender?
“The whole idea is to get the cheapest money,” Cantor said, and that can mean pursuing the best contractor and the best lender — and pairing t the best deal from each.
Homeowners must have a firm grasp of the type of loan that will address their entire financial situation, beyond their project goals, Cantor told Straight Arrow. Securing a home equity line of credit (HELOC) on their own, for instance, might provide more flexibility in paying for several types of projects through several contractors. Going for a loan through a contractor’s recommended lender is more likely to secure enough money for the project, but it could also limit the homeowner’s ability to shop around for competing bids.
Dig through the paperwork to determine “who the actual lender is,” Katsman said. “If it’s a big bank giving out thousands of loans, chances are they’ll have a better rate.”
And, understand the full scope of the loan commitment, Katsman said. A loan collateralized by the house is less risky for the lender and thus likely offers a better rate, but will also be attached to the house until it’s paid off. Experian’s analysis found that over half of current personal loans are anchored by collateral owned by the borrower.
“Know what you’re getting into,” said Morgan, the bankruptcy lawyer. “Transparency is always the bigger issue. Separate your enthusiasm for the project and the contractor from the lender. You don’t have to use the contractor’s finance company. They are two different transactions.”
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Ella Rae Greene, Editor In Chief
