How Do Home Improvement Loans Work?
Every property eventually needs redecoration, repair, or renovation. However, these expenses are often more than most people have sitting in an account.
Fortunately, there are affordable financing options. How do home improvement loans work? We’ll walk you through the process!
Discover Why Home Improvement Loans Are Important
Home improvement loans help homeowners stretch their finances for various household needs, such as:
- Repairing and replacing major components to keep your home livable, safe, and comfortable
- Adding resale value or preparing a home for use as a rental property
- Upgrading a home for better livability
- Adding a home office or work area that meets local regulations
- Creating an addition for an expanding family
A home improvement loan helps you achieve these goals and put your house in its best condition.
Understand the Types of Home Improvement Loans
You have many affordable options for home improvement loans. Take a look to determine which is best for you.
Home Equity Loans and Home Equity Lines of Credit
A second mortgage is perfect for folks with stable incomes and high home equity. Home equity loans and home equity lines of credit (HELOCs) are good options.
Home equity loans are ideal if you know what you will spend on your improvement project. This option is similar to other loans, where you pay the principal and interest from the start.
An advantage of this type of lending is that you have immediate equity going back into the home as you pay off the loan. You also get a fixed rate for steady payments.
You could also consider a HELOC. HELOCs are optimal if you aren’t sure how much you will spend on a project. You gain access to a specific line of funds, and you can draw from the line up to the line amount, much like a credit limit on a credit card. You only pay interest during the draw period, which usually lasts 10 years. If you repay all the money before the end of the draw period, you don’t have to worry about the combined principal and interest installments during the repayment period.
Borrowers should remember that a HELOC has a variable interest rate.
Both financing types leverage your home as an asset. Fair warning: you could lose the property if you don’t repay on time. However, a suitable lender will help you find a reasonable loan. Find out how to get a home equity loan here.
FHA Title I Home Improvement Loan
How do home improvement loans work through government programs? The Department of Housing and Urban Development insures Title I improvement loans for upgrades, repairs, and alterations that meet its requirements.
You must also meet the standards set by your state and municipality. Since these prerequisites vary, discuss the option with an approved local lender to understand the conditions.
Title I loans are ideal for manufactured homes. You can even use these along with FHA 203(k) loans. Learn additional information about FHA loans here.
FHA 203(k) Loan
Your home may need critical repairs that affect its livability, or you may want to purchase a home that needs tons of work. Applying for two loans can be a hassle, plus you have the extra expense of double closing costs.
An FHA 203(k) loan may be your best option. You can lump a home’s purchase with improvement costs into a single mortgage with competitive interest rates. If you renovate an existing home, you may be able to refinance your mortgage with this government-backed loan.
FHA Energy Efficient Mortgage Program
How do home improvement loans work for environmentally friendly projects? You could qualify for an EEM to make energy-efficient upgrades.
An eco-friendly home brings cost savings through lower utility bills. Lenders use the information to offer friendly financing terms. A professional will evaluate your property to determine the Energy Savings Value. This figure helps the lender calculate the savings it can extend.
Learn the Eligibility Requirements
All loans have conditions for approval. How do home improvement loans work for eligibility?
Credit Score and Income Requirements
The better your credit score and the higher your income, the more favorable your rates will be. The general credit score requirements are:
- Home equity: Usually over 680 but sometimes as low as 640
- FHA Title I: No fixed requirements from the FHA, but an approved lender may have stipulations
- FHA203(k) and EEM: At least 580 but in some instances as low as 500
- Personal loans: Typically above 620 with few exceptions
Income requirements vary with the size of the loan and the amount of existing debt. Lenders generally insist on a debt-to-income ratio below 43%, though FHA Title I sets it at 45%.
The requirements for a property are also distinct for each loan type. Second mortgages require you to own the home and have sufficient equity.
FHA Title I loans involve meeting HUD specifications, which include:
- A home with occupancy for at least 90 days
- Verification of the proceeds for property improvements
- Mortgage insurance on the property
For FHA 203(k) loans, the money must be for a primary residence, and contractors must perform the work. FHA EEM requires homeowners to have at least a 3.5% cash investment in property. Personal loans rarely have property requirements.
How To Improve Your Chances of Approval
How do home improvement loans work for financially responsible buyers? Higher equity in your home increases your odds of getting a second mortgage. When you already have energy-efficient practices in place, you raise your chances of getting an EEM.
Increase your loan approval odds with these tips:
- Minimize debt, especially unsecured financing.
- Keep your debt-to-income ratio low — aim for less than 43%.
- Boost your income.
- Use property or assets as collateral when possible.
- Avoid applying for other forms of credit six months before trying to get a home improvement loan.
If your project is at least six months out, you might consider loan consolidation to help your DTI ratio.
Apply for a Home Improvement Loan
Now that you have the knowledge, you only need to go through the application. How does the application process for home improvement loans work?
Gather the Right Documents
Your lender needs proof of income and details about your assets and liabilities. The agent will pull your credit account to determine your current payments.
Employees can show a W-2 or paystubs to demonstrate wages. Self-employed folks should bring bank statements and a couple of years’ worth of tax returns. Your home also needs an appraisal to determine the amount of available equity.
Choose a Lender
Find a friendly company that has your best interests at heart. Check for positive online reviews and personable staff. The organization should have proper accreditation and awards that display its commitment to excellence.
A good lender should have educational resources to help you understand your options. Lenders that care about the community support their neighbors with programs and aid, such as grants and scholarships.
Start the Application Process
Once you have found the ideal lender, head online and contact the team to start the application process.
Get Started on Your Florida Home Improvement Project Today
Are you ready to take the first step toward your home improvement project? At The Associates Home Loan of Florida, Inc., we understand the importance of making a house into your “Home Sweet Home.”
That’s why we offer a wide range of home improvement loan options to suit your needs. Apply now to qualify for a loan, and turn your dream home into a reality.