Get a Home Improvement Loan

Home repairs and renovations can be very expensive, but they are often necessary. Urgent projects such as mold remediation and structural repairs cannot be put off and planned for, while updates in finishes may be required if you are trying to sell your home soon. A common way to obtain money for renovations is through a home improvement loan that's secured by the equity you have accumulated in your home.

Steps

Finding the Right Loan

  1. Estimate the total cost of your home improvement project. Knowing the cost of your project is critical in determining the required size of your home improvement loan. Make sure to get estimates from several contractors to ensure you are getting a reasonable price.
    • Make an allowance of about 10 percent in determining your ideal loan amount, as unexpected costs may arise during the renovation.
    • At this point, you should consider whether you will be able to pay for any part of the home repair with cash. Doing this will lower the loan amount needed, which will make it easier to obtain and reduce the total interest charged.
  2. Familiarize yourself with your credit history. Your credit reports carry the most weight for lenders making a loan decision. In the U.S., you are entitled to one free credit report each year, which can be accessed through https://annualcreditreport.com. Credit reports can also be paid for through the three credit bureaus or through a third party business.
    • Remember, you can't get your credit scores with the free credit report. If you're looking for your scores, you might need to pay for that.
    • Make sure to check for any discrepancies between your Read a Credit Report and any activity that looks inaccurate or fraudulent. Take strides to resolve these issues with the credit bureaus before attempting to secure a home improvement loan.
  3. Get an appraisal, if necessary. Some home improvement loans might require you to get an appraisal. That's because some loan options are based on the amount of equity in your house and to determine the value of the equity, the lender will need to know the overall value of the house.
  4. Shop around for the right loan. A loan is typically a second mortgage on the home, and the limit of loan will depend upon the equity in the house after the loan is included. You'll want to do some research before applying for a loan. Try to avoid loans that put you in debt greater than 80% of the market value of your home.
    • Start shopping by simply Googling "home improvement loan". You'll find plenty of sites that offer home improvement loans. Some of those sites will allow you to get competing offers from multiple lenders.[1]
    • Don't forget to check out lending institutions in your area. Many banks offer attractive home improvement loan options.
    • Look for the lowest interest rate. Remember, when comparing interest rates, don't just look at the headline number. Be sure to check the annual percentage rate (APR).[2]
    • Also consider the length of the loan. Remember, a longer loan means lower payments, but it will take you longer to pay it off.
    • You might be eligible for a Title I Home Improvement Loan. A Title I loan is a great option because it's guaranteed by the FHA in the event that you default, so it's a low-risk loan from the standpoint of the lender. Also, it might be your best bet if you have limited equity in your house because Title I loans under $7,500 don't require any pledge of equity.[3]
    • Keep in mind that home improvement loans that don't require a pledge of equity in the house will likely require a down payment. However, you'll probably pay a higher interest rate for a limited loan amount if you aren't willing to offer collateral.[4]

Applying for a Home Improvement Loan

  1. Gather the necessary documentation. When applying for a loan, you will need to produce several important documents, including proof of employment (such as pay stubs), proof of any supplementary income, and tax-related documents spanning several years back. Make sure you check these documents for any inaccuracies as well.
    • Some lender might require you to produce the estimate provided by the contractor.
  2. Get pre-qualified. You want to be sure that you can get the amount of money you need. To do that, get pre-qualified for a loan.[5]
    • Pre-qualification for a loan involves providing the lender with information about your financial situation without handing over documentation. Just be clear that when you formally apply for the loan, you'll need to hand over financial statements and tax documents that prove you were telling the truth when you got pre-qualified.
    • You can get pre-qualified online or over the phone.
    • When you're pre-qualified, you'll also be told the maximum amount that you can borrow. If that's not enough, you'll need to raise some cash to complete your home improvement project.
  3. Get pre-approved. The next step, after getting pre-qualified, is getting pre-approved. That's a much more involved process that involves formally applying for the loan and providing the documentation that you gathered in Step 1 to the lender.
    • Sometimes, you can apply for a home improvement loan online. However, if you're approaching a lending institution in your area, you'll probably be required to apply onsite.
    • Applying onsite is often easier because you can provide your documentation directly to the person who's handling the loan. That's much faster than mailing things back and forth.
  4. Review the loan details. Once you've applied and been approved for a loan, be sure that the interest rate and terms spelled out on the documents are in line with what you were promised. Don't sign any loan documents until you've determined that the terms are what you expect.

Warnings

  • Do not sign any loan agreement without making sure you understand all of the terms clearly. Consider having an attorney look at the agreement if you are unsure about any of the provisions.

Things You'll Need

  • Proof of employment
  • Proof of supplemental income
  • Tax documents

Related Articles

Sources and Citations

  1. ↑ https://www.lendingtree.com/
  2. ↑ https://www.usbank.com/home-loans/mortgage/what-is-mortgage-apr.aspx
  3. ↑ http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/title/sfixhs
  4. ↑ http://www.realtor.com/advice/finance/get-home-improvement-loan/
  5. ↑ http://www.investopedia.com/articles/basics/07/prequalified-approved.asp
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