Best Types of Home Improvement Loans for 2022 Roger Odoardi If only home renovations were as easy as they look on those HGTV shows. Then your biggest concern would be whether you like the designs the renovation experts chose for you. But everyone isn’t so lucky to be selected for one of these shows, so understanding how to get a home improvement loan is the next best path towards achieving your ideal living space. What Is a Home Improvement Loan? A home improvement loan is a financial agreement with a bank, lender or other institution, in which you as the borrower can use designated funds to upgrade your property. Whether your home is in need of updates, or you’re looking to build upon your house’s existing value, a home improvement loan can help you accomplish your renovation goals. Typically vetted quickly — with loans often approved within one or two days — home improvement loans can provide fast access to loan amounts ranging from as low as $5,000 to as much as $100,000. The amount of interest you pay and the time you have to repay the loan can vary, depending on your credit history, the loan amount and your contract terms. Here are the steps to take before you explore your home renovation loan options, as well as a summary of the types of loans available. Estimate Your Project Cost Before even applying for a loan, gathering estimates from contractors will help you establish a baseline of how much your home improvement project will cost, which will give you an idea of the amount you’ll need to borrow. It’s important to get these estimates from professionals, since home renovations and fixer upper projects can often run into unforeseen roadblocks throughout the construction process. For example, you may not know that your bathroom has mold in the walls and you’ll definitely need that to be taken care of during the improvements. But this could have a hefty price tag that will need to be considered in your final loan amount. Receiving estimates should also help you consider if you can pay for some of the improvements in cash. This could help lower the loan amount you need, which will save you money in the long run. Make sure to request estimates from several contractors so you can shop around for the best deal for your home improvements. Evaluate Your Equity The majority of home improvement loans depend on the homeowner’s equity, which is the portion of the home that is already paid for. The equity in your home then becomes the collateral for the loan. But even if you have a good amount of equity, you’ll need to demonstrate that you are financially capable of paying your debts as well as this additional home renovation loan. Your ability to pay it back on time and in full will then set the final terms of your loan. Understand Your Credit History Just as with applying for a New Hampshire, Maine, Massachusetts, Connecticut, Vermont, Rhode Island, Florida, North Carolina, Colorado, Texas, Georgia or South Carolina, your credit score can impact the terms of the loans your fixer upper project will be eligible for. And, as with any type of loan, the higher your credit score, the better terms you’ll likely receive. If you’re worried about a low credit score, a home improvement loan won’t necessarily be out of the question. There are government loans, private lenders and co-signing opportunities that you can still pursue. For more details, check out our blog: How to Get a Home Improvement Loan with Bad Credit. Get an Appraisal Since many home improvement loans are based on the amount of equity you have, the lender will need to know the overall value of your home. Not all lenders will require this, but you should be prepared, just in case. Types of Home Improvement Loans Once all of your ducks are in a row in terms of documentation and expectations, you can begin to research the different types of loan options that may be best for you. Cash-Out Refinance If you need access to home improvement funds immediately, cash-out refinancing might be your best option. In a cash-out refi scenario, your existing home loan is replaced with a higher value mortgage, enabling you to leverage the equity you’ve built up in your home. Most lenders allow homeowners to borrow up to 80–90% of their home’s value in cash, clearing the way for you to quickly complete your home improvement plans. Cash-out refinancing is a great option to pursue when interest rates are low and when you plan to live in your home for a long period of time. There are a few different cash-out refinance options available, depending on the type of loan you carry. Conventional Cash-Out: A good option for borrowers with high credit scores who have at least 20% equity built up in their homes FHA Cash-Out: A popular choice for borrowers with lower credit scores or those who have recently gone through bankruptcy VA Cash-Out: A great option for veterans, who can receive up to 100% of their equity (although experts agree borrowers should not cash out more than 90% of their home’s value) In order to qualify for cash-out refinancing, you may need to meet certain criteria, such as: At least 20% equity in your home A minimum 620 credit score A Debt-to-income (DTI) ratio below 50% Home Equity Loans Unlike cash-out refinancing, home equity loans require the borrower to use the equity of their home as collateral. These loan types usually require good credit, and they can be a bit pricier than others since there are additional fees like appraisal, originator, title, closing and others. Despite carrying additional costs and stiffer eligibility requirements, home equity loans are a popular option for those looking to make home improvements, as they enable you to immediately rebuild equity in your home. The average loan term lengths for home equity loans can range from five to 30 years. The loan amount will be determined by the value of your property — which will need to be determined by a licensed appraiser. Home Equity Line of Credit Think of a home equity line of credit (HELOC) like a credit card. You are able to withdraw money as you need it during a time limit that’s set by the lender. As you pay some of the balance off, your credit will revolve and you can withdraw it again. Home equity lines of credit can have fluctuating rates that can end up higher than the rate you’d receive on a fixed home equity loan, making them much riskier. However, this open credit line gives you more flexibility than a fixed-rate home equity loan. The added flexibility of HELOCs makes this option a popular choice for those undertaking longer term projects, since you can use as much or as little of the money as needed and only repay what you spend. Keep in mind that if your home value decreases during your HELOC loan period, you may end up owing more than your home is worth. Therefore, a HELOC may also be a good choice for those looking to sell their homes in the foreseeable future. Watch Our Video Comparing Cash-Out Refinancing and HELOC FHA 203(k) Loans This loan type is backed by the federal government and allows borrowers to purchase a property with the cost of repairs and upgrades included. Although FHA loans are typically associated with first-time home buyers, you need not be a first-time home buyer to take advantage of a FHA 203(K) loan. The intention behind this loan concept was to help revitalize struggling neighborhoods by offering loans with lower down payment — often as low as 3.5% — and credit score requirements. Credit Cards Although using credit cards for your home improvement project is not always recommended, there may be some instances where doing so is acceptable. Since credit cards often carry high annual percentage rates (APRs) and low credit limits compared to loans, you are best served using them only for emergencies or smaller unexpected expenses. However, if you have no other options for funding your home improvements and you must use a credit card to do so, prioritize using cards that offer generous cash-back rewards to help offset your spending and any fees you may incur. Personal Loans Personal loans can provide another financing option for upgrading your home when it’s in need of repairs or renovations. Although these types of loans usually carry a higher interest rate, one upside to pursuing a personal loan is that you won’t be required to use your house as collateral. These loans can be a good choice if you need fast access to funds or for emergency renovation and repair situations, but keep in mind that you may end up paying more over time than some of the alternatives listed. Other Home Improvement Financing Options Beyond the home improvement financing choices listed above, you can also pursue alternatives such as contractor financing and government-backed loans. Contractor financing: When you work with a contractor to complete renovations to your home, sometimes they will offer financing options. However, these loans are usually processed by a third-party lender. In some instances, borrowers may be able to make payments to the contractor over time, but borrowers are typically required to make a few large payments instead of more manageable monthly payments over a longer period. Government loans: The US Department of Housing and Urban Development offers its Title I Property Improvement Loan Program “to finance permanent property improvements that protect or improve the basic livability or utility of the property—including manufactured homes, single-family and multifamily homes, nonresidential structures, and the preservation of historic homes. The loans can also be used for fire safety equipment.” With this type of loan, the FHA insures private lenders against the risk of default for up to 90% of any single loan. This program can be used to finance loans for up to 20 years and offers up to $25,000 for improving a single-family home or for improving or building a nonresidential structure. Borrowers can also take advantage of these government-backed loans from the US Department of Agriculture and the US Department of Energy: USDA Section 504 Home Repair Program: Extends loans to very-low-income homeowners who need to repair, improve or modernize their homes, as well as grants to very-low-income homeowners who need to remove health and safety hazards from their homes. USDOE Weatherization Assistance Program: Offers weatherization updates to households at or below 200% of the national poverty level who need assistance with energy-saving upgrades. Home Improvement Loan Requirements Lenders are often cautious when it comes to construction loans. There is a lot of trust that needs to be placed in the builder, and if things go wrong, the lender could soon realize that they’ve made a bad investment. Because of this, there are very strict qualifying requirements for this type of loan, including: Finding a qualified builder that’s approved by the lender Providing the lender with a comprehensive list of project details Like the floor plans, types of materials being used, etc. Getting an estimated home value from an appraiser Paying a large down payment – usually between 20-25% On top of these requirements, you’ll need to prove you have good credit and are financially healthy. FAQs What is a home improvement loan? A home improvement loan is a financial agreement with a bank, lender or other institution, whereby the funds received are intended to upgrade your property, either to increase your home’s value or to make necessary repairs. How can I use cash-out refinance to help with my home improvement project? When you select cash-out refinancing, your existing home loan is replaced with a higher value mortgage, enabling you to leverage the equity you’ve built up in your home to make needed renovations or repairs. How can I access my home equity through cash-out refinancing? First you may need to meet certain criteria, such as having at least 20% equity in your home, a minimum 620 credit score and a debt-to-income (DTI) ratio below 50%. If eligible, you may be able to gain quick access to up to 80–90% of your home’s value. No matter your situation, you have a variety of options for financing your home improvement project. The team at Blue Water Mortgage can help you determine which you may be eligible for, and can guide you in the right direction throughout the loan process. Contact us today to get started! Roger Odoardi Roger is an owner and licensed Loan Officer at Blue Water Mortgage. He graduated from the University of New Hampshire’s Whittemore School of Business and has been a leader in the mortgage industry for over 20 years. Roger has personally originated over 2500 residential loans and is considered to be in the top 1% of NH Loan Officers by leading national lender United Wholesale Mortgage.