What is a Home Improvement Loan?
Home improvement loans are useful if you need to make emergency repairs. If you have leaky pipes in the basement or a termite problem and can’t wait to save up enough money for repairs, a home improvement loan can help you finance home repairs on your own terms. Typically these are some of the best personal loans and can be secured quite quickly online, and there are plenty of easy-to-use lending companies that are happy to help you along the way.
How Long Does it Take to Get Approved?
You can go through an initial online application process that may only take a few minutes, but you’ll still need to get approval from a lender assigned to your application. The amount of time it will take you to get approved depends on a number of factors, but the more ready you are the better. Formulate a loan request that covers a specific amount of money before you start contacting lenders.
You also need to get all your documentation in order, and this can sometimes lead to delays. Get a copy of your credit score and pay stubs, and any other documentation that can indicate your financial standing - including any outstanding debts - and can indicate your ability to keep up with the payments.
The good news is that a high credit score should mean that you can get approved quicker than someone with a low credit score.
If you are using your home equity as security on the loan, then the amount of your mortgage you’ve paid off can be a major factor, as is the value of property in your area and if your house has accrued value since you started the mortgage. Lenders may require an appraisal of your home before agreeing to finance you.
You should expect an approval process that takes anywhere from 2-6 weeks, depending on how prepared you are with your proposal and your documentation.
When to Take Out a Home Improvement Loan
If you’re looking to carry out a small project - say, for just a few thousand dollars - it’s probably better to just wait until you’ve saved the cash on hand to pay for it, instead of accruing more debt for something that you may be able to afford without a loan.
For larger projects though, a loan may be your only option.
If you have enough equity on your home to secure your loan, you should have a good chance of being approved for a loan with lower interest rates and APR, which will be easier for you to keep up with.
If you plan on selling your home soon or in a couple of years, then taking out a home improvement loan is a very good way to significantly increase the value of your property before putting it on the market.
If you have a nagging repair that needs fixing, then a home improvement loan can help you take care of it before it worsens and becomes significantly more costly, thus saving you more money down the road.
The Pros and Cons of Home Improvement Loans
Home improvement loans are a great way to add serious value to your home, but not every loan is created equal. The benefits depend on which type of home improvement loan you attain. With an unsecured personal loan you won’t need to put up any personal collateral - such as a house - but the interest rates you receive should be higher and the APR could be tough on your monthly budget. With a secured loan the rates could be better, but you’ll also have to put up collateral such as your house or other asset. A personal line of credit allows you to just spend what you need and are highly flexible - they also tend to have high interest rates.
When weighing the benefits, think about what is most important to you and then you can decide which type of loan to pursue.
Home Improvement Loan Options
A personal loan can be a great idea if you have outstanding credit debt and a less than stellar credit score. If you use the personal loan to pay off the credit card, you can improve your credit score by making on time payments of your personal loan.
A credit card can allow you to pay for home improvements before you have the funds, and approval for cards is typically not difficult. That said, the credit limit might not cover your renovation costs, and the interest rates on credit cards tend to be high.
A home equity line of credit is a smart way to get a loan if you’ve accrued equity on your home. When you get a HELOC what you’re doing is borrowing off the equity on your home in order to get a line of credit. You decide when to use the line of credit and for how much.
Home Equity Loan
This is similar to an HELOC, in that you borrow against your equity, but instead of a line of credit, you’re given a specific sum of money to repay.
If interest rates have dropped since you first took out your mortgage then a refinance could help you save money on your monthly payments, which you could use for other expenses like home renovations. You can also look into a cash-out refinance in which you borrow enough money to pay off your original mortgage and still have some cash left over for renovations.
Paying in Cash
Though it may only be an option for small projects, If you’ve got the money to pay for the renovations up front, this can help you avoid taking on new debt and also the fees that come with taking out a new loan. It’s always wise to keep money set aside in a rainy day fund though, so if you use all of your saved-up cash for the renovations you may need to take a loan further down the road if unexpected costs arise.
What to Consider When Taking out a Home Improvement Loan
- Can you make the payments?
Make sure before agreeing to a loan that you can pay it off within the agreed time frame. If you can’t make the payments on a line of credit over the next 12 to 18 months, you may need to reconsider.
- Secured or unsecured?
When deciding between an unsecured home improvement loan and a home equity loan, you’ll have to reconsider what’s more important: not having to put up collateral with an unsecured home improvement loan, or paying less interest with a home equity loan where your property is used as collateral or a personal loan where other assets are used as collateral.
- Will your renovations stay within the budget?
If possible, do your best to predict any possible cost overruns over the cost of the renovation that could potentially require you to take out another loan down the road. It goes without saying, but make sure to use contractors you trust, who will make a proposal and stick to it.
What You Need to Apply
When you apply for a home improvement loan you will first need to collect all of the necessary documentation, which can be one of the lengthier parts of the loan process.
Your credit history
Having a good or at least fair credit rating can be essential to receiving a loan.
Debt income ratio
Your debt income is an overview of your monthly income and monthly expenses. It is a solid indicator of your ability to keep up with the payments and what type of monthly bill you can afford. Make sure to provide the lender with a record of any outstanding debts or monthly payments.
Hammer out your budget and itemize your work plan
Cost overruns are common in home renovations, but before applying, make sure to get a detailed overview of the entire cost of your renovation project. This shows not only that you’ve taken all of the costs into consideration, but also that you’re serious about the project and about paying it off. You may also want to consider making the sum a little higher in order to pay for any possible cost overruns.
Get pre-qualified and pre-approved
When you get pre-qualified, you supply a lender with an overview of your financial status - including all income and debts - and the lender gives you an assessment of that type of loan you can qualify for. This gives you a very good sense of your options. Pre-approval doesn’t mean that your loan has been approved, rather, it means that the lender has decided that you may be approved for a loan when the full application is submitted.
How to Get the Right Home Improvement Loan
- Do your research
Like with any financial decision, you’re going to want to start by doing a lot of research. First find out the total cost of your home improvement project, and if possible leave a little wiggle room in the off chance there is a cost overrun. Shop around with various contractors until you find one with recommendations and the professionalism necessary to get the job done on time and on budget.
- Know your credit history
Figuring out your credit history - and working to improve it - can help you get a loan with better rates, which will be easier for you to stay ahead of down the road.
- Assess your finances
Look at your finances and see how much of the renovations you’re able to pay for up-front with cash. This will lower the amount of money you’ll need to take out in the loans, and should help you keep the interest lower.
- Consider an appraisal
This may only be relevant if you’re considering a home equity loan, but it can be essential to whether or not you get approval and also regarding the size of your loan.
- Determine what’s most important to you
Some people would prefer to pay more interest with a lower monthly payment while other borrowers would rather pay more each month on a shorter term loan in order to pay less interest.
- Figure out what you need
Cost overruns can happen in home improvement, but the more prepared you are the better. By really going deep into the details of what you need to pay for, you can get a better idea of what you can afford, helping you decide what’s important, and which renovations can wait.
- Shop around
Maybe it goes without saying, but hiring a contractor you trust is essential. This will help you stay within budget, and also ensure that you get the best value for your buck.
What if You Have Bad Credit?
Even if you have bad credit you can still get a personal loan, though you may face some hurdles that people with better credit don’t worry about as much.
A credit score of less than 630 is typically considered a bad rating, meaning that you will pay APR that can easily be above 25%.
If slowly repairing your credit over time isn’t an option, there are some steps you can take right now to improve your situation, such as:
- Pay your bills on time every month
- Keep within credit card limits
- Not opening any new credit card accounts
- Paying off any outstanding debt
- Make sure your credit report is accurate
In the long term, you still have some avenues you can take, by pursuing lenders that award loans to people with bad credit, for example:
Credit unions are member-owned and typically award lower fees and better rates than banks, so if you can join one, that could be a good idea.
On peer to peer lending sites you can find lenders willing to take on a borrower with poor credit, though this may be reflecting in the fees, interest rates, and APR that you receive.
Home equity loans
If you have bad credit but have worked up a good bit of equity on your house, you can qualify for a loan with potentially good terms.
They say not to mix family and finances, but if you have someone with good credit who can cosign a loan for you, it can really help. Not all lenders facilitate co-signed loans, and also, the person who co-signs is on the hook for the loan too so if you can’t keep up with the payments you can hurt their credit rating and financial standing.
The Next Step
Now more than ever, there’s no reason to postpone putting off those renovation plans you’ve been dreaming about. A home renovation loans is easy to get online with rates and conditions that can fit your needs. Find out what type of work you want to get done, what it should cost you, and then start combing the web, it’s never been easier to find a company that can find you the right home improvement loan.
To read more about any of these loan companies or other companies, check out our in-depth reviews.