Home improvement loans are generally tied to a specific upgrade on a currently owned house such as finishing a basement, upgrading a kitchen, or adding a second bathroom.
A home improvement loan allows the borrower to upgrade a specific area of the home, under loan terms designated by the bank, lender, or other financial institution issuing the loan.
Specifics of a home improvement loan
Unlike a mortgage or a reverse mortgage, a home improvement loan is a personal loan that can be obtained without collateral (like your home). Your home will not be at risk. These types of loans are paid back in installments, usually monthly, depending on the size of the loan.
Home improvement loans typically have smaller loan amounts, shorter payback periods, and fewer fees. Most loans are paid back within three to five years.
Deciding if This Type of Loan Is Right
Consider your monthly budget and the project’s size to determine if this is the right avenue. Will this project add value to the current home? How long will the renovation take? How healthy is your financial score?
If you have excellent credit, then taking out a home improvement loan could be the best solution to boost your home’s value.
How to Secure a Home Improvement Loan
It is easier than ever before to secure a home improvement loan, and your current bank may offer loans. Shopping online for this type of loan is now extremely easy. Pull up a web browser and search for dozens of loans at different interest rates and payback times. Before you apply, there are some basic questions a lender will ask.
- Personal information including name, address, and phone number
- Information about any other loans or opened credit cards in the last three months
- How much do you want to borrow and why
- Annual household income
- Education level
- What other assets do you possess in savings or investments
- Debt-to-income ratio to prove you can pay the loan back
Check Your Credit
Any credit score over 660 should get loan approval. The higher the score, the better the loan agreement with the lender. If you are unsure of your credit score, check it online, and make sure you agree with what the reporting agencies have documented.
What to Expect When Applying
When shopping for the home improvement loan online, preliminary loan offers should come back right away with the loan amount and interest rate offered.
Some lending institutions will offer a “soft pull” on your credit report, which means it will not count against your score unless you go ahead and complete the full application and formally apply for the loan.
Even one hard inquiry can cause your score to go down a few points. This might make the difference in getting the interest rate you want or even getting the loan at all. When in doubt, ask the lender if a negative effect on the credit report is a concern.
Closing the Loan
Financing a home improvement project takes some time and research, and after the loan is secure, the money is as good as cash in your pocket. Take the money and buy new paint and carpet or upgrade the deck just in time for grilling out.