Home Improvement Loans
Since we have received many questions about home improvement loans. We decided to make a full guide article to answer all your questions. Some didn’t even know what home improvement loans are. Some wanted to know how to qualify their homes for it. The questions you will find here are some of which we received. So if you want to know more about home improvement loans or if there any questions we missed, feel free to submit it in the comments below. Let’s head down and see the answers for each one of them.
Q1 What is a home improvement loan?
It’s basically a loan given by many spread properties and banks to homeowners who want to make huge improvements on their homes that they can’t afford. Much of which put you on a waiting list or tie you up with bank paperwork. Let alone the home equity that tackles down most homeowners and puts their homes at risk. So you need to be careful who you deal with and what loan type you commit to.
- Q1 What is a home improvement loan?
- Q2 How do home improvement loans work?
- Q3 How to get home improvement loans?
- Q3.1 Home Equity Loans (HEL)
- Q3.2 Home Equity Line of Credit (HELOC)
- Q3.3 Personal Loans (Unsecured)
- Q4 How to qualify for home improvement loans?
- Q5 Can you get home improvement loans with a mortgage?
- Q6 How to get home improvement loans with bad credit?
There are several methods for that purpose. Whether you borrow from local banks, HELOC, credit union, or you borrow from personal loaning companies that offer flexible quick deals with less captivating customs such as prepayment penalties. We will talk about the methods of loaning more specifically down below.
Q2 How do home improvement loans work?
When you try to get a loan, some factors are required such as the loan amount, the period of time you would take to repay the debt, your monthly income, and your credit score. You need a high credit score, because the higher it gets, the lower your interest rate will be. I suggest you go for a fixed rate and flexible terms.
Basically, the steps you will go through the process are:
- Realizing the cost of the project you need to do
- Checking your credit history. Making sure your credit score is appropriate.
- Sometimes it’s necessary to get an appraisal and determine the equity of your house, especially with equity loans.
- Search around for the suitable loan. Don’t underestimate this step.
- Gather information about the lender and collect the required documents to apply.
- Give the lender information about your financial states to make sure you get pre-qualified. Don’t give documents yet.
- Formally apply and provide the documents you have collected to get pre-approved.
According to the steps mentioned above, we will talk more specifically about the importance of the first and two steps. Alongside with the following steps from finding the right loan to collecting your documents. We will give you more information about the different loaning programs and I’m sure you will easily find your way through to step 7. Check the next question.
Q3 How to get home improvement loans?
First of all, you need to plan your home improvement. Consider the project you will need the loan to cover. Perhaps you meet a contractor to ease the process for you.
The National Homebuilders Association suggests that you set a schedule, request a written proposal, and request a written lien waiver when the work is finished. This document will verify that the workers were already paid. And that if they have any sub-contractors, this will put the extra payment to the contractor instead of you.
After setting everything up and realizing your home improvement needs, it’s time that you determine your financing source. Looking at the different ways you can finance your projects such as cash, credit cards, home equity loans, and personal home improvement loans. We will assume you have a bad credit card, and no cash to cover the project. So we will talk about home equity and personal loans.
Q3.1 Home Equity Loans (HEL)
Houses valued more in the past, but now there aren’t many houses with high equity on them. That’s one reason why equity loans are not as much common now and loaning guidelines became tough. However, they are still around for homeowners who still got money in their properties.
Equity loans are like a lien on your property or a second mortgage. The quantity funds you will get to improve your house depends on the equity of your property itself, which is not a very good option for new homeowners. Basically, if your house is worth $100k but doesn’t actually have a mortgage on it, your loan will be up to 75% with full documentation.
Q3.2 Home Equity Line of Credit (HELOC)
HELOC differs from home equity loans in its flexibility, and the amount of money distributed whether you have high equity rates or not. This is a good point for HELOC considering that you want to borrow money periodically as if it were a credit card. But let’s get more specific on the pros and cons of HELOC.
- You see, its credit limits are a bit high than equity loans.
- If you have large equity in your house, you will get a high amount of cash.
- HELOC loans give you tax benefits, the interest paid is considered tax deductible.
- It has lower interest rates compared to other personal loans or credit cards.
- The one I like the most, their repayment flexibility. You will be offered options to select from on how you’d like to repay your loan.
- Let’s not joke at ourselves, all the debts are dangerous. Once you obligate to an HELOC/equity loan, it uses your house as collateral. Don’t mean to frighten you but you risk losing your house if you fail to repay your debts.
- Once you have taken a loan against your house, the same amount of equity is lost from your property. So you better watch out if you have paid off your mortgage or if you wanna sell your house. The value of your home is then dropped. And whoever the lender is able to freeze your line of credit accessibility.
- Unreliable adjustable interest rates. Imagine a huge increase in the rates. Nothing will guarantee the amount of payment from one month to the next due to the unstable interest rates when they are tied to the prime rate.
Q3.3 Personal Loans (Unsecured)
Personal loans are unsecured ones. This means no properties used as collateral, a good option. In addition to the easier application. You are not obliged to use your house as collateral. So it’s more like a long term loan, and a big amount of money is offered. However, due to the insecurity of it, they have higher interest prime rates.
Personal Loan Pros:
- Increase your house value without risking it as collateral.
- Personal loans offer an experience with low, fixed rates.
- More flexibility, the money is yours once delivered. You can use the money on whatever you want to fix, improve, or add to your house.
Personal Loan Cons:
- Make sure the monthly payment will fit your budget because a personal loan can get you out of a hole. But there’s always a chance you dig yourself a bigger one.
- However the many recommendations we get for personal loans, some of them actually have much higher interest rates.
- If you’re using the loan to pay off a credit card debt, don’t fool yourself that you’re paying it off, you’re actually transferring it from a debt to another one!
Personal loans sources to check out:
- Local bank
- Credit union
- Peer to peer lending
Check these for bigger home improvement project coverage:
- Home equity loan (second mortgage)
- Cash out refinance
- 401k loan
Q4 How to qualify for home improvement loans?
There are three main factors to guarantee yourself a qualified application for home improvement loans.
- Home Equity
I guess we have established the importance of the healthy amount of equity to qualify you for a home equity loan. You can’t qualify for a home equity loan with no equity in your home.
There are some cases that you might not qualify for a home equity or HELOC. At this point, we look for personal loans. It’s the same in the terms but more flexibility deadlines and no home equity required.
2. Credit History
Any loan institution would evaluate your qualification for the loan according to your credit history, so this is a top priority. Since home equity loans are second mortgages, that puts higher expectations which make it more dangerous. Lenders are looking for a minimum FICO score of 620. But you basically need a score of 680 to qualify easily.
3. Debt-income ratio
The number of your monthly debt obligations divided by your monthly income. Your total mortgage and equity obligations should be below 41% and not more, the lower it gets, the more qualified you are. What lenders aim to by this term is to make sure you are having enough income to cover your obligations alongside with your living expenses.
Q5 Can you get home improvement loans with a mortgage?
Just to make sure you understand the different of mortgage vs home-equity loans. They both use your house as collateral, put a lien on your house, however you name it. But what’s sure is that the lender can take possession (foreclosure) of your house whenever you exceed your deadline payment.
As mortgage loans differ from other types. The borrower can take the mortgage loan to purchase a house. While with a home equity loan, you take the loan after you have purchased the house. If you are taking a loan to purchase a house. The lender usually helps with up to 80 percent of the house’s price. Meaning if you are buying a $200k house, your mortgage will be $160k and leave you to pay the $40k yourself. After that, you should pay back the loan plus interest rate (Fixed or adjustable) over an agreed term, 30 or 15 years.
But a home equity as we said before, is a second mortgage on your house. The higher rates go back to the risk put on the lender himself since he does not get paid until the first mortgage is paid his money back.
Can you take a home improvement loan with a mortgage? The answer is yes. There are actually two little-known sources for that purpose.
- FHA‘s 203(k) program
- HomeStyle Renovation Mortgage
These two programs by Fannie Mae and the Federal Housing Administration offer a mortgage loan depending on the house’s expected value after finishing the improvement projects. They require insurance that the money is only spent on the house. For the FHA, you are asked to hire a consultant in order to assess every draw made. But for the HomeStyle loan, only initial & final inspection is required, no consultant needed. Moreover, these are probably your next choices for bad credit scores.
Q6 How to get home improvement loans with bad credit?
It’s pretty hard to get approved for home improvement loans if you have bad credit score. That for sure is a challenge. But as long as there are alternative solutions there’s nothing out of the reach! Don’t let your bad credit stop you from improving your house.
- Consider the government loan programs. The U.S. Department of Housing and Urban Development (HUD) have various offers about home renovation loans, aiming to help homeowners with bad credits such as the FHA program mentioned above and the FHA Title1.
- Your other option is a private/personal loan since these loans specialize to help borrowers with bad credits. In fact, you might be as suitable for the loan because your stats ensure the good use of the money.
- Most homeowners go for the easy option which is to find a co-signer amongst the family. Especially when they fail to get a secured loan due to their bad credit history. It’s like a third party who signs the contract and help you get lower interest rate.
To a final say, you really need to keep track of your credit card history in order to fix your rating by time… These are some of the questions we thought are most important to answer and would give you a whole image about every inquiry you had in mind about home improvement loans. For any further questions feel free to ask in the comments below. Can’t wait to see your feedbacks!