Home improvement loans are a great way to add value to your home, and they are relatively easy to obtain if you have the right qualifications. The following information will explain how home improvement loans work, show you how you can get approved for one, and offer one alternative to home improvement loans if you do not qualify.
Understanding Home Improvement Loans
As the name implies, home improvement loans are borrowing you do to upgrade your current home. Typical home improvement loans are for a specific amount to complete a defined project. Unlike refinancing a home, which creates another long term mortgage, or a line of credit, which can be open-ended, home improvement loans typically are for a defined period of time shorter than a mortgage. Five to ten years is not uncommon for home improvement loans. The equity in your home serves as collateral for secured home improvement loans. Your personal financial standing will determine the borrowing terms you receive.
Know Your Project
The first step toward getting home improvement loans approved is to know the project you hope to accomplish. The more precise an estimate you have the better. Your lender will expect a request for a specific amount of money to complete a specific task. Within that parameter, there is a lot of flexibility. Home improvement loans can be made to upgrade a home, to add on to a home, improve landscaping or just about any other project that is expected to add value.
Have Adequate Equity
The equity in your home is the primary reason home improvement loans are relatively easy to qualify for. Equity is the current value of your home less the current balance on your mortgage. You reduce your loan value by a limited amount in the early years of your loan when you are mostly paying interest. However, if home values are rising in your community you can still generate substantial equity in just a few years. The equity in your home is the security for the loan.
Be Financially Suitable
Even with adequate equity, homeowners need to demonstrate financial suitability to qualify for home improvement loans. Remember, you have a mortgage payment and are adding a second loan payment to it. Your household income will need to be an adequate size to convince lenders you can pay both notes. Your credit history will not always be checked for home improvement loans because of the security provided by your equity. But having a strong credit score and clean credit history always helps in the application process.
Loans with Bad Credit
If you have bad credit there are still home improvement loans for which you can qualify. Adding security, such as valuable personal property, to your equity amount can help. A cosigner with good credit can help. Also, specialty lenders, which will charge higher interest rates, also offer a possibility.
Lines of Credit
One more flexible alternative to home improvement loans which might be easier to qualify for is a home equity line of credit. These are open ended loans for a negotiated percent of your home equity which can be used for any purpose. If you don’t draw any of the available credit, you owe nothing. If you draw a small amount, you begin making payments only on that amount immediately. With a home equity line of credit you can make large improvements in small steps over time.