Home Improvement & Home Remodel Loans

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Owning a home can be quite expensive, even after the initial purchase. There may come a time when expensive renovations are necessary to deal with serious repair issues. In some cases, the owner may want to invest in improvements that will not only improve the home’s function, but also its value. Because home improvements, in general, can cost tens of thousands of dollars depending on the extent of the project, many homeowners need to borrow the money. Fortunately, home improvement loans are available to eligible homeowners.

How Much Can Be Borrowed For a Home Improvement Loan?

Many different factors determine how large a home improvement loan a homeowner can take out. This includes the type of loan they apply for, their personal credit history and credit score, their loan-to-value (LTV) ratio, and more. Generally speaking, no lender will provide over 100 percent of a homeowner’s LTV. Doing so is incredibly risky since if the homeowner is unable to pay, the lender will lose money even if they foreclose on the house.

Calculating Your LTV

A homeowner’s LTV (which is expressed as a percentage) is determined by dividing the amount of the loan by the appraised value of the house. For example, if the homeowner is taking out a $20,000 loan for home improvements on a house valued at $200,000, it means their LTV is 20 percent. The higher the LTV is, the more of a risk the loan is to the lender.

There Are Multiple Options For Securing Your Remodel Funds

Homeowners who need financial help to make renovations can apply for several different types of loans. The following is a brief breakdown and comparison of these types of loans:

Home Equity Loans vs Personal Loans

Home equity loans are taken out against the equity a homeowner has in their house. For example, if they have a mortgage of $200,000 and they have a balance of $150,000 left to pay, it means that they have $50,000 in equity they can borrow against. Home equity loans are available at fixed interest rates and usually for a 15-year period. A home equity loan can also be used for whatever the homeowner wants to use it for, including home improvements of any kind.

Personal loans are cash loans provided directly to the borrower. Personal loans are typically unsecured, which means no collateral is needed. Personal loans are similar to home equity loans in that the borrower will have to pay them back on a monthly basis for a specific amount of time. The interest rates on a personal loan are based on the credit score and credit history of the borrower. Because they are unsecured, lenders are stricter about approving personal loans based on the credit score and history of the borrower.

Home equity loans are a good option as long as the homeowner has enough equity to borrow the amount needed for their home improvements. However, homeowners that default on their home equity loans risk foreclosure, whereas borrowers who take out personal loans will not be risking the loss of any assets should they default. On the other hand, because they are unsecured, personal loans typically have higher interest rates and higher monthly payments. They are also generally limited to $100,000 and below.

Government Supported vs Private Loans

Private loans are provided by non-institutional lenders. They often approve borrowers despite not having great credit, making them a good alternative for some homeowners to banks or other financial institutions. Private lenders also boast a quick application and decision process.

However, because they have more lax requirements, private loans do tend to have higher interest rates. Depending on the borrower's credit, the loan may be secured or unsecured. If the borrower has poor credit, it will be easier for them to be approved if they apply for a secured loan, which will require them to put up one of their assets (such as their vehicle or house) as collateral in case they default.

There are a number of government-backed loan programs that homeowners may be eligible for as well. Government-backed home improvement loans aren't loans provided directly to the borrower. Instead, the government insures the loan provided by the lender to the borrower. By insuring the loan, the government reduces the risk of the lender, making them more willing to approve a borrower's loan application.

One of the big advantages of a government-supported loan is that the interest rates tend to be much lower than those of a private loan. The government takes responsibility for the loan if the borrower defaults, thereby eliminating the risk for the lender.

Home Equity Loan vs Home Equity Line of Credit

There are two main ways for a homeowner to take out a home improvement loan against the equity in their home: a home equity loan and a home equity line of credit. Home equity loans are lump sum loans available at a fixed interest rate. One of the disadvantages of a home equity loan is that making one large withdrawal can work against the borrower should property values in their area go down.

A home equity line of credit (or HELOC) provides a line of credit the borrower can draw from whenever they want. This means that if they are provided with a $20,000 line of credit, they don't necessarily need to take out everything at once. This can be beneficial if they are planning several renovations over a period of time since they will only be charged interest on the credit that they use, not the credit that they have available to them. HELOC loans are also available with both fixed rate and adjustable rate terms.

Government Supported Loan Programs

Government-supported loan programs are an excellent option for eligible borrowers since they are often available with low interest rates and because they are easier to qualify for. The following are some of the government-supported loan programs available for home improvement loans:

FHA* 203k

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The FHA* 203k loan allows borrowers to finance both the house itself and any repairs that are needed or wanted. The loan, which is also referred to as a rehab loan or an FHA* construction loan, was designed as a way to help borrowers who buy fixer-uppers. Few lenders are willing to approve loans for homes in need of significant repair work, making the FHA* 203k loan an excellent option for homebuyers who want to invest in a fixer-upper. However, there are certain safety and livability standards that the house must meet.

Because the FHA* 203k loan is a subtype loan of the FHA* loan, eligibility is relatively easy. Borrowers can qualify even with credit scores as low as 580--although some lenders may require minimum credit scores of 620 to 640 in order to qualify. There are two types of FHA* 203k loans, the limited 203k mortgage (also referred to as the 203k streamline) and the 203k standard.

The 203k mortgage allows minor repair work under $35,000, such as work to kitchens and bathrooms. Although there is a $35,000 limit, the loan requires a buffer of 15 percent as a contingency in case the repair costs go over what the contractor estimated. Almost all non-structural and non-luxury repairs and renovations are eligible, including everything from new appliances to roof replacement. A minimum improvement of $5,000 is required and if the renovations add up to over $15,000, a HUD inspection will be required. A 203k standard loan is available for almost any type of renovations the borrower wants to make, including structural alterations and larger landscaping projects. The only restrictions include non-permanent changes and luxury amenities.

FHA 203k loans do have slightly higher interest rates than the standard FHA mortgage loan. An estimate of the renovation work by a fully licensed and insured contractor and an appraisal of the home is required to be eligible.

Fannie Mae’s HomeStyle Loan Program

Fannie Mae (Federal National Mortgage Association) is a government-sponsored financial institution that provides a variety of different loans, including loans to homebuyers. The Fannie Mae HomeStyle loan program is very similar to the FHA* 203k loan program.

What is a HomeStyle Loan

Like the FHA* 203k loan, the HomeStyle loan is designed to help borrowers interested in buying a house in need of renovations or repair work. Homebuyers can borrow up to 97 percent of the combined cost of the house and the renovation costs. The remaining three percent is required as a down payment.

Eligibility Requirements

A minimum credit score of 620 is required. Borrowers must also provide proof of income. Although Fannie Mae does not impose any debt-to-income ratio limits, many lenders do. Borrowers may not be eligible if their debt-to-income ratio is higher than 43 percent. Additionally, a construction contract must be in place with a contractor vetted by the lender.

Maximum Loan Amounts

There is a limit on eligible renovation funds. This limit is 75 percent of the lesser of either the sum of the purchase price and renovation costs or the as-completed appraisal value of the house. Eligible renovation funds for manufactured housing is capped at the lesser of either 50 percent of the as-completed appraised value or $50,000.

Other Important Factors

Only certain types of homes are eligible for the HomeStyle loan. These homes include one to four-unit primary residences, one-unit secondary homes, one-unit investment properties, manufactured homes, or units in condos, co-op projects, or eligible planned unit developments.

Freddie Mac Loan Program

Freddie Mac (Federal Home Loan Mortgage Corporation) is the other major public government-sponsored financial institution that provides mortgage loans. Freddie Mac offers two types of renovation loans: purchase and refinance.

What is a Freddie Mac loan

Freddie Mac's purchase loans can be used to cover the cost of a home as well as any renovations needed, making them a good option for borrowers interested in purchasing fixer-uppers. Freddie Mac also offers refinance loans for homeowners that allows them to refinance their current mortgage loan while also providing extra funds to be used for home improvement projects.

Eligibility Requirements

The house must be site-built to be eligible for a Freddie Mac loan, which means that it can't have prefabricated sections. Like Fannie Mae, Freddie Mac loans require that the borrower has a credit score of at least 620. However, unlike Fannie Mae, Freddie Mac allows non-occupant co-borrowers.

Maximum Loan Amounts

Freddie Mac provides a maximum of 50 percent of the improved value to borrowers--up to the conforming limit. The conforming limit in 2018 (as established by the FHFA) is $453,100 for one-unit properties. In high-cost areas, that amount is 150 percent more at $679,650.

Other Important Factors

Freddie Mac's renovation loans are available in 15, 20, and 30-year fixed rate loan options. Renovations made using the loan must be completed within 120 days of the loan's closing date.

FHA* Title 1 Loans

Private Home Remodel & Home Renovation Loans

Private loans are not guaranteed by the government, including loans provided directly to borrowers by private lending companies. Even though they are not insured, qualifying for a private loan isn’t that difficult, especially since many private loans are secured using collateral. Even though many of these loans are secured, they do have their share of advantages.

Benefits of Private Finance over Government Backed Programs

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Benefits of taking out a private home improvement loan instead of applying to a government-backed program include:

  • It’s easy to qualify – When private loans are secured, they become easier for borrowers to qualify for. This is because putting up collateral for the loan makes the loan much less of a risk to the lender. As a result, borrowers with less than stellar credit scores or credit history may find it easier to qualify for a private home improvement loan.
  • Shorter approval process – Conventional loans can take a while to be approved. Private lenders have a shorter approval process. While conventional loans often take up to 45 days for borrowers to be approved, private loans often take a few weeks.
  • Good option for flipping – Most private loans have very short payback periods. While this can be a detriment to some homeowners, it can be beneficial for owners who are looking to repair a home or renovate it to boost its value so that they can flip it.

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