How to Get (and Qualify for) a Home Improvement Loan
Want to make a major improvement to your home, but don’t have tens of thousands of dollars in cash to dedicate to the project?
You’re not alone. Most homeowners can’t pull off a $25,000 bathroom remodel or kitchen renovation without a little help. And even if you do have the cash on hand, you might not want to tie it up in your home.
If you want to add value to your home without parting with all the cash in your bank account, one option is to use a home improvement loan instead.
What to Know Before You Get a Home Improvement Loan
A home improvement loan sounds appealing and it can be a great option for homeowners. But there are some things to consider first.
The biggest consideration? Home improvement loans are loans. You borrow a set amount of money that you need to repay over an agreed-upon period of time. Until you pay off the loan, it’s debt in your name – just like any other loan.
And you need to pay interest on that debt, too. The interest rate on a home improvement loan might range anywhere from 4% to 10% more. Over time that can add a lot to the cost of your project.
It could be worth it in the long run if your home’s appreciation is significant. But it’s a risk homeowners take when they finance projects in an effort to increase their home’s value.
You should also know that there are other options. A home ownership investment from a company like Unison can give you the money you need without monthly payments and without interest charges. The Unison HomeOwner program allows you to unlock the equity in your home – which you can use to pay for upgrades and renovations.
What You Need Before You Apply
If you decide a home improvement loan is right for you, you’ll need to make sure your financial ducks are in a row before you apply for one.
The first thing you need to have is equity in your home. Lenders are usually hesitant to lend to borrowers who have less than 20% equity in a property. If you’re not there yet, focus on making your mortgage payments on time and in full — or even consider adding a little extra to your monthly payments to reduce the principal balance more quickly.
In addition to value in your home, you need to show you can reasonably afford to repay the loan. That means lenders look at and evaluate your income to ensure you can handle the monthly payments over the loan’s term until it’s paid in full.
Qualifying for a Home Improvement Loan
The amount of money you ask for can influence whether or not a lender approves your application. Make sure you only request what you actually need. That means running estimations with contractors, service providers, and material suppliers before going to the bank. Know exactly how much your project will cost and account for mistakes and unexpected costs.
Then, apply only for the amount of money you need. Keeping the amount down may increase your chances of approval — and it will certainly make your monthly payments lower and bring down the overall cost of your project.
Your credit can play an even bigger role in whether or not you qualify for the home loan you want. If you regularly miss mortgage payments, already carry a lot of debt, or recently opened lots of new credit lines, a lender isn’t likely to approve you.
That’s because you look like a risky borrower more likely to default on the loan. But if your credit history shows a strong track record of making payments on time and your great credit score reflects the fact that you manage your accounts well and keep balances low, you’re more likely to qualify — and to get a better (lower!) interest rate.
And remember, you’re not out of options if you apply for a home improvement loan but can’t get approved. Try saving up the money you need in cash or explore other types of financing that may make more sense. Or skip the debt and partner with a company like Unison.