Quirky Homes: A Tough Sell for Lenders

NEW YORK (MainStreet) — Hunt for a house in the Northeast and you’ll overdose on center-hall colonials. In Arizona, you’ll find a lot of contemporaries, and in other areas you might see street after street of ranch houses.

Perhaps you’d prefer something out of the ordinary: a log home, a design transplanted from another part of the country or a house with an unusual floor plan. But be careful—today’s jittery lenders often reject applications involving unique homes, fearing they’ll be hard to resell in the event of a foreclosure, according to HSH Associates, a mortgage data firm.

In tough times, the mortgage market goes through the same kind of flight to safety that drives investors to blue chip stocks or U.S. Treasury bonds.

“Before you commit to buying a quirky home, or refinancing the one you already own, know ahead of time what heartache you may run into,” HSH says.

It’s easy to see why lenders might shy away from the truly unusual, like homes made of rammed earth, old planes or crushed beer cans. If the structure falls apart, its value as collateral will disintegrate, exposing the lender to a loss if it must resell the property after a foreclosure.

HSH says today’s lenders are especially nervous about any feature that could hinder a resale or put the property’s value in question. All else being equal, borrowers are likely to have a harder time getting loans for log homes, green homes, homes with odd floor plans, extra-large lots, or mixed uses, like a store with living quarters above.

In better times, lenders don’t worry so much: property values rise and there are lots of buyers, foreclosures are less likely, the property will sell fast if there is a foreclosure and appreciation should reduce the lender’s risk of a loss.

Sadly, “the unprecedented wave of foreclosures recently has taught mortgage lenders that being able to foreclose and resell a property in a timely fashion is as big a part of managing their mortgage portfolios these days as anything else,” HSH says.

Among the problems lenders face when trying to sell a unique home is putting a value on it when there’s little data from comparable home sales. A lender may back away from the mortgage simply because it’s not familiar with the home’s construction style. Log homes, for example, are common in some areas of the country, but in other areas, appraisers won’t know the difference between a custom log home and one built from a kit. That would be considered a risk.

Green homes may be harder to mortgage because there are few comparable sales, and because it’s hard to assess the future value of unusual structures, recycled materials or features like solar panels.

Unique floor plans can be a problem as well, particularly with a home that has the bath on a different floor than the bedrooms, or the kitchen far removed from the dining room, HSH says. In these cases, unusual often means undesirable.

A home with an extra-large property may be especially attractive to some buyers, but a lender might feel there is too little comparable sales data to set a clear value.

In tough times, financing a home can be a lot like going for a job interview.  A blue business suit might seem boring, but it is probably the most prudent clothing choice. With a home, it’s probably best to stick with features that have broad appeal, then use decorating to make your home unique.

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