Home Improvement Loan Programs
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Everyone has a few home improvement projects that they want to complete. Whether it’s building out a patio or redoing the entire HVAC system, these home improvements can be expensive. That’s where home improvement loans come in. There are two major types of home improvement loan: home improvement loans for new purchases, and home improvement loans for existing homes. Here’s an overview of your lending options.
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Home Improvement Loans for a New Purchase
Let’s say you’re interested in purchasing a home, but it needs a lot of work. Maybe it isn’t even habitable right now — or maybe you’d just rather replace the floors before moving in. In this situation, you can get a home improvement mortgage. This is a mortgage that has a certain amount of the home’s value tied to it for improvements. If the home is currently worth $200,000, you might borrow $250,000 instead. That extra $50,000 will be used for renovations.
There are several home improvement mortgages available. Generally, they have a cap on the amount that they will pay out for renovations. Some of them let you do a portion of your work yourself, but often the work has to be done by a professional contractor.
Here are a few types of new purchase home improvement loans:
- The HomeStyle Mortgage. Under the HomeStyle Mortgage, you can finance up to $25,000 of home improvements. These loans are for individual home buyers, investors, government agencies, and non-profit organizations. HomeStyle mortgages don’t have a minimum down payment (though the lenders providing them may ask for a minimum down payment), and they use the “after repaired value” of the home to judge the home’s value.
- FHA 203k Loans. If you’re already considering an FHA loan, an FHA 203k loan is very similar. FHA 203k loans have higher credit score requirements: 640 minimum. However, they will give homebuyers up to $35,000 towards renovations and repairs. Professional contractors need to be used for these repairs, but the down payment requirement is only 3.5%.
- FHA Energy Efficient Loans. These loans specifically provide for improvements that will make a home more energy-efficient. That includes things like insulation, smart thermostats, solar panels, and repairing or replacing an HVAC system. Since these are commonly very expensive renovations, this loan can be useful.
But what if you’ve already purchased a home and want to make repairs? That’s when you need a home improvement loan for an existing home.
Home Improvement Loans for an Existing Home
When you already have an existing home, your home improvement options are a little more varied. You’ll be looking at two types of loans: secured and unsecured. A secured loan is secured with the value of some type of property (such as your home). An unsecured loan is not.
You can consider:
- Personal loans. Short-term personal loans are available to those who have good credit scores. Most personal loans will need to be repaid within five years, and the interest rates tend to be fairly high compared to real estate loans. However, a small personal loan can be easier to get than a home equity loan.
- Direct financing. HVAC companies, for example, offer their own financing and payment plans. If there’s a specific renovation that you need, you may be able to finance it directly through the contracting company. The interest rates may be high, however.
- FHA loans. FHA runs a loan program that allows for up to $25,000 for a single-family home. If the loan is under $7,500, it’s an unsecured loan; if it’s more than $7,500, it’s a secured loan. These loans are repaid over 20 years. They can be used for large repairs, energy-efficient upgrades, renovations, and additions. There’s no income or credit score requirement.
- Home equity loans. Home equity loans and home equity lines of credit (HELOCs) rely upon the equity that you have in your home. If you own a $200,000 home and owe $100,000 to the bank, you currently have $100,000 in equity. You can use this equity to secure a loan. Home equity loans are excellent for buyers who qualify; they have low-interest rates and repayment terms from ten to fifteen years. However, they do require that you have a minimum credit score of 680.
- Refinancing. It’s possible to do something called a cash-out refinance. Consider the above example: you own a $200,000 home and owe $100,000. You can refinance your $100,000 loan for $150,000 and get $50,000 of cash out from the bank. You will increase your mortgage payment (unless you lengthen the term of your loan), but you’ll be able to use the cash for anything you want.
Since there’s such a large variety of home improvement loans available, it’s in your best interest to compare terms with a few options. If you have good credit and a solid debt-to-income ratio, there are quite a few options available.