You might want to beautify your home, fix a glaring problem, or just add more value to the home. All of these things can be accomplished with the help of a home improvement loan if you don’t have the money on hand to cover the costs yourself.
With the right qualifications, you can you can get approved for this loan and be well on your way to achieving your predetermined goals.
But as with any other type of loan, there are some things you need to know beforehand, and there are some parts of your finances you may have to fix before you apply so you’ll get approved.
This article breaks it all down for you in laymen’s terms.
You’ll learn what home improvement loans are, how to get approved for one, and you’ll learn what the alternatives are in case this loan is out of your reach.
What Are Home Improvement Loans?
If you want to make upgrades to your home but need to borrow, a home improvement loan may be your answer. These loans are used to update the current home you own.
They are usually given to complete a specific project for a defined price. They are not like refinancing, which are long-term loans, but rather set for a shorter period of time. A common time frame for these loans is 5 to 10 years.
Secured loans will use your home’s equity as collateral. The standing of your personal finances will decide how much you will be able to borrow and the terms of the loan.
Figure Out the Details of Your Project
The first thing you will want to do, in order to get your home remodeling loan approved, is to plan out your project in a detailed manner. The more detailed the better.
You will want to have a precise estimate of the cost of the project. The lender will want the project information along with the specific amount of funds to execute it. These loans can be used for just about anything that adds value to your home.
Some example projects in which these home loans are used for include landscaping, adding a new addition to the home, and upgrading a kitchen to look more modern.
Having Enough Equity
One of the primary reasons it is easy to get approved for home remodeling loans is due to your home equity. The loan’s security is your home’s equity, so you will want to make sure you have an adequate amount. Lenders are only going to give a home improvement loan to a homeowner who has enough equity to cover the loan cost and enough money left over for other housing expenses such as the primary mortgage.
But you need to be careful with lenders that are willing to stretch the limits of what a reasonable amount of equity is compared to the size of the loan they will be giving you. For example, if you have 30% equity in your home and a lender is willing to give you a loan that’s greater than that, it’s a red flag you should take seriously.
It’s a sign the lender is not concerned with whether you’ll be able to pay the loan back or not. And that’s a big problem because if you default, the lender takes possession of your home. So, it’s a sizable risk for you. You could lose your home.
Be Financially Stable
In order to qualify for home improvement loans, you will also need to show signs of financial stability, even if you have a good amount of equity. Adding another loan payment on top of a mortgage payment is something to really consider.
In order to persuade the lenders that you can cover both payments, you will need to have a good-sized household income. A strong credit history is sometimes needed as well to get approved. Often times, lenders will not check your credit history, due to the security brought by your home’s equity.
Bad Credit Home Improvement Loans
If the lender does happen to check your credit, and you suffer from a low credit score, there are still some options you can take.
The first step you can take is adding personal property to the home equity, which will increase the security amount. Another step that you can try is co-signing with a relative or friend with a high credit score.
Some lenders may also offer low credit loans for remodeling you house, which will usually have higher interest rates. But that too, is very risky.
Home Equity Line of Credit as an Alternative
A home equity line of credit is a good option if you can’t get approved for home improvement loans. They are easier to obtain for homeowners with low credit scores.
Home equity lines of credit take a percentage of the equity of your home, which you can use for anything. You make payments as soon as you use the line of credit. This process means you will make home improvements over time in smaller steps.
They are still a good way to add value to your home and if you don’t use any of the credits, you will not make any payments.
Adding value to your home is simple with this loan. They are a great way to increase the value of your home and they are fairly easy to obtain if you have adequate home equity and a good credit score.
Be sure to shop around when looking for home improvement loans in order to get the best interest rates. If your credit is not so good, you can also opt for a home equity line of credit to add value to your home.