Loans To Pay For Home Renovations

If you purchased a home that needs a little TLC or your home is in need of major renovations, you might be wondering how you will pay for them. Of course, you could put the renovation costs on a credit card, but that means paying significantly higher interest rates. Plus, it could be hard to get the amount of credit needed for a massive renovation project if your credit is not great.

Fortunately, there are all types of home renovation programs available to finance your dream project — even if you have less than perfect credit. There are so many different options, terms, and lenders that you might be able to finance a lot more than you think. Knowing what program you qualify for can be quite time-consuming and confusing. So, that is where we come in. This guide will go over some of the most popular loan programs for home renovations and how to qualify for these special financing programs.

Government-Backed Loans

The following loans are backed by the federal government, which means that they can be easier to get than private home renovation loans. They are also a good option if you do not have a lot of equity in your home.

#1 Fannie Mae’s HomeStyle Renovation Mortgage

The HomeStyle Loan by Fannie Mae is one of the most well-known for home improvements. It can be used to make repairs on a home purchase or paying for repairs on a home you already own. The HomeStyle Loan is available from any Fannie Mae-approved lender. If you are a buying a house that needs repairs, you can bundle the financing for your home purchase with the renovation mortgage. This allows you to make just a single monthly mortgage payment.  However, you must meet specific requirements that you must meet to qualify for this loan.

Requirements: If you are purchasing a home, then the loan to value ratio cannot be more than 97 percent of the home’s final value (with renovations). So, you would need to come up with a down payment of three percent to qualify.

Credit and Income: You must have a credit score of 620 and a debt-to-income ratio of less than 43 percent. Additionally, you must be able to show proof of a steady income and meet other credit requirements as outlined by the individual lender that you choose. The requirements are similar for a HomeStyle Renovation Refinance Loan.

Renovations: A licensed contractor must make all upgrades. The limit on renovation funds is 75 percent of the appraised value of the property as completed. If the property is not habitable at the time of purchase, that is okay as long as it will be ready within six months.

#2 FHA 203K Mortgage Programs

The FHA's 203k Mortgage Programs help homebuyers and existing homeowners to obtain money for renovations. The 203k mortgage provides extra money to pay for improvements. The advantage of the 203k Mortgage Program is that it is usually much easier to qualify for since it is an FHA program versus a conventional as is the case with Fannie Mae's HomeStyle program. The 203K loan can be for 15 or 30 years. It can be a fixed or adjustable rate.

The Streamline 203K Mortgage Program — often called a limited 203K mortgage — is specifically for homeowners to refinance their current existing loan and receive extra money to make renovations. This loan eliminates a lot of the paperwork with the 203K program and simplifies the process of obtaining funds hence the name.

Requirements:

To qualify, you must occupy the property. It cannot be vacant for more than 15 days during the renovations. The work must be completed within six months.

Credit and income: You must have a credit score of at least 620. It some cases, a minimum score of 640 is required. Your debt to income ratio must be below 41 percent. You need a down payment of at least 3.5 percent. You must live in the property that you plan to renovate. It cannot be an investment property or a second home.

Renovations: All renovations must be performed by a licensed contractor. Workers must obtain a permit if one is required. The list of renovations includes HVAC systems, a new roof, kitchen and bath remodeling, handicap accessibility improvements and more. There are certain renovations not allowed under this program, such as swimming pools, room additions, repairing structural damage and moving a load-bearing wall.

Private Home Renovation Loans

If you have a lot of equity in your home, then you might qualify for a private home renovation loan. There are several types of private home equity loans. Here are the most common.

Cash-Out Mortgage Refinance

If you have a lot of equity in your home, then this can be a great option. It allows you to refinance your mortgage for a higher amount than the current value of your home. You get the difference between the value of your home and the loan in cash. If you can find a lower interest rate, you could save money in the long run on a cash-out refinance. To qualify, you must usually have a credit score of at least 640 and meet other credit requirements. Additionally, you will need at least 20 percent in equity.

Home-Equity Loans

The advantage of a home equity loans is that they are fixed, so monthly payments remain the same for the life of the loan.  A similar product, the home equity line of credit, or HELOC, is another option. It is a revolving loan meaning that you have a line of credit that you can use to fund repairs as needed.

Other Ways to Finance Home Repairs

If you are a police officer or EMT, you might check with lenders to see if there are any programs specifically for these professions. Sometimes lenders offer discounts as a way to say thanks. Check out this blog post on police officer tax deductions to save at tax time too.

What if you are in dire financial straits and don’t have the credit to qualify for one of these loans? Maybe you need serious repairs to continue to live in the house though. If this is the case, click to learn more about how Chapter 13 bankruptcy can prevent foreclosure. This might free up your budget enough to allow you to make needed repairs to your home. If you have recently filed bankruptcy, check out this post about foreclosure surplus funds that you might be entitled to. These excess funds can help you make repairs, as well. Want more useful tips? Check out our post on How To Promote Daycare Business.