How to Choose the Best Home Improvement Loan
Taking out a home improvement loan is a big decision that requires careful planning. In choosing the best home improvement loan, you should take into consideration the following steps:
#1. Determine “Why” You Need a Home Improvement Loan
Typically, home improvement loans are tied to a particular home improvement or repair needs, like installing a new kitchen or creating wheelchair ramps. When you apply for a home improvement loan, you are more likely to get approved by a lender if you can convince the lender about your specific need for the loan.
For example, if you’re making your home disability-friendly, you should explain to the lender and prove how it can improve the quality of life and add value to the home. So, it is important that you determine whether the project in hand truly requires you to take out a home improvement loan.
#2. Compare Personal Loan Lenders
At Simplemoneylyfe, we always encourage our readers to compare personal loan lenders. Many personal loan lenders will let you prequalify before even submitting your loan application. This allows you to get an insight into the best possible loan terms and interest rates you would receive without affecting your credit score.
#3. Understand the Fees
Home improvement loan comes with their own share of loan fees. From personal loan origination fees, late payment fees to prepayment fees. Before taking out a home improvement loan, it is important that you understand the potential fees that come with a home improvement loan.
#4. Online Experience
When choosing a home improvement loan, it is important to consider the lender’s online experience. Always opt for home improvement loan lenders with a robust online loan application and lending system. By working with a lender with a robust online experience, you can easily apply for a loan, get prequalified, and be approved over the internet.
#5. Eligibility Requirements
While each type of loan comes with its set of eligibility requirements, it is important that you evaluate the eligibility requirements that come with each type of home improvement loan. You should also speak to lenders to see if they can relax any of the loan requirements.
#6. Loan Amounts
Different home improvement loans offer borrowers a certain maximum loan amount. When choosing a home improvement loan, you should consider the maximum loan amount that comes with the loan.
#7. Customer Service
A home improvement loan lender with excellent customer service is always the best option when it comes to choosing a home improvement loan. When choosing a home improvement loan, you should evaluate the effectiveness of the lender’s customer service. Find out if they have physical and online customer support and how fast they respond to queries.
Other Types of Home Improvement Loans
Home Equity Loans
A home equity loan lets you borrow against the equity in your home and is secured by your home as collateral. This can make a home equity loan easier to qualify for than other loans. The interest on this type of home improvement loan might be tax-deductible. The downside is that you could potentially lose your home if you fail to make loan payments.
A cash-out refinance replaces your existing mortgage with a new, larger mortgage. You withdraw the difference between the two mortgages and use the money however you want, including for home improvements. However, you’ll need at least 10% to 20% equity left after the refinance. This percentage varies depending on your lender and whether you’re willing to pay for private mortgage insurance (PMI) on the new loan.
Home Equity Line of Credit
A HELOC lets you borrow against your home’s equity like a home equity loan. The difference is that a HELOC acts like a credit card, giving you revolving access to funds up to your credit limit. You can draw against it multiple times and only repay the amount you borrow plus interest.
>> More: Best HELOC Lenders
A personal loan allows you to borrow money from a lender for almost any purpose, typically with a fixed term, a fixed interest rate, and a regular monthly payment schedule.
Collateral is usually not required, and personal loans typically have lower interest rates than most credit cards. Since interest rate and loan terms on a personal loan are fixed, you can select a loan and payment amount that fits within your budget—which is great when you’re consolidating debt.
>> More: Best Personal Loans
An FHA 203(k) rehab loan, also referred to as a renovation loan, enables homebuyers and homeowners to finance both the purchase or refinance along with the renovation of a home through a single mortgage.
Instead of applying for multiple loans, an FHA 203(k) rehab loan allows homebuyers to purchase or refinance their primary home and renovate it with one convenient loan. By allowing the buyer to finance the cost of improvements into the purchase or refinance of a home, home rehab loans take the financial guesswork and frustration out of renovating a home.
Title 1 Loan
FHA Title 1 loan is one of the numerous ways through which the federal government helps low-to-moderate income homeowners finance critical home improvements and rehab. FHA Title 1 loan is usually the go-to option for homeowners who do not qualify for a traditional home equity loan.
Funds received from FHA Title 1 loans can be used to rehab single-family homes, manufactured homes, multi-family homes, as well as non-residential properties. In addition, borrowers may use the loan for site rehabilitation and the preservation of historic buildings. According to the Department of Housing and Urban Development, FHA Title 1 loan can be used for anything that makes your home livable and more functional.
A construction loan is a short-term, higher interest loan that covers the cost of building or rehabilitating a residential property. Construction loans are typically for less than a year, and the funds are paid out in a series of installments, known as “draws,” while the home is being built.
Once the home is built, construction loans are usually refinanced or converted into a traditional long-term mortgage to pay for the house.
A renovation loan allows borrowers to buy the home they want and pay for their desired renovations and repairs, all under a single loan. The loan can then be paid back over time through affordable monthly payments, like a conventional 30-or-15-year mortgage. Generally, home renovation loans are available to homeowners in the form of:
- A purchase mortgage, with additional funds for renovations
- A refinance of your current mortgage with a cash payout for home improvements
- A home equity loan or line of credit (HELOC)
- An unsecured personal loan
- A government loan, such as Fannie Mae HomeStyle loan or FHA 203(k) loan
Are Home Improvement Loans Tax Deductible?
The short answer is yes, you can deduct interest paid on a home improvement loan from your income tax. But according to the Tax Cuts and Job Acts, there are several limitations.
To claim a tax deduction, you need to meet two conditions:
- Your home improvement loan must be secured by your primary residence.
- You must use the proceeds to “substantially improve” the property that’s securing the loan.
But what does this jargon mean? This means that before you can deduct the interest paid on a home improvement loan, the loan must be used to do repairs that add value to the property secured by the loan.
Secondly, the home improvement loan must be secured by the property in which you live in. While you can deduct interest paid on secured home improvement loans, unsecured home improvement loans are not tax-deductible.
Can You Get a Home Improvement Loan with Bad Credit?
Yes, getting a home improvement loan with bad credit is possible. However, you may have to deal with high-interest rates and unfavorable loan terms. In addition, most personal loan lenders will expect you to provide collateral to secure the loan and reduce the risk. If you hope to get a home improvement loan with an excellent loan term, you should consider improving your credit score and history before applying for one.
What Do Home Improvement Lenders Look for in an Applicant?
Below are some things home improvement lenders look out for when underwriting a borrower for a home improvement loan.
Your Credit Score
Nearly all home improvement lenders will look at your credit score and history because it gives them insight into how you manage borrowed money. A poor credit history indicates an increased risk of default. To increase your approval rate and access to lower interest rates, you should aim for a score in the 700s and 800s.
Closely linked to your income is your debt-to-income ratio. This looks at your recurring monthly debt obligations in relation to your monthly income. Most home improvement lenders would like to see a low debt-to-income ratio. On average, most lenders will require a DTI ratio not greater than 43%.
So, if your debt payments take up no more than 43% of your income, most home improvement lenders won’t accept you. More importantly, if you have a high income and credit history, your lender may be willing to make an adjustment to accommodate your high DTI ratio.
Home improvement lenders want to know that you will be able to pay back what you borrow, and as such, they need to see that you have a stable and considerable income. While there is no standard income amount, lenders will want to see an income that matches the amount that you’re borrowing.
Is It Smart to Get a Home Improvement Loan?
Unless you’re fortunate enough to fund your home improvement needs in cash, getting a home improvement personal loan can make good sense. And if you have an excellent credit score, you can benefit from the low-interest rates and better loan terms that come with taking out a home improvement loan.
Summary: Home Improvement Loans
- Upgrade: Best Overall Home Improvement Loan
- Upstart: Best for Easy Qualification
- SoFi Personal Loans: Best for Online Experience
- LightStream: Best Overall Home Improvement Loan
- Marcus by Goldman Sachs: Best for Customer Support
- Discover Personal Loans: Best for Traditional Home Improvement Loans
- Avant: Best for Bad Credit
- OneMain Financial: Best for Online Experience
- Prosper: Best for Peer-to-Peer Home Improvement Loans
- Best Egg: Best for Bad Credit
Bottom Line: Best Home Improvement Loans
A home improvement loan can be an excellent option if you’re looking to finance certain home improvement needs in your home. With a plethora of home improvement loans to choose from, you are sure of getting a great deal. More importantly, you should shop around lenders and compare loan terms before choosing a home improvement loan.
To select the best home improvement loan lenders, we reviewed over 25+ personal loan lenders and 30+ mortgage lenders. Our evaluation included reviewing the lender’s eligibility requirements, online and mobile experience, security, transparency, and funding times. Read our editorial guidelines and personal loan rating methodology to learn more about the integrity of our reviews.