HOME IMPROVEMENT LOANS

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IMPROVEMENT LOANS

Unsecured

The Unsecured Home Improvement Loan Application Process

An unsecured home improvement loan is based on the merits of your application and not on your collateral. Unsecured loans are more difficult to achieve for those with bad credit because there is no collateral to negate the lender’s risk in the situation. Because this is a risky loan, it will be more expensive to the borrower. This type of loan is best for a home owner with limited equity but a solid financial history.

State the Purpose of the Loan

Home improvements will increase the value of your home and a home improvement loan is a useful tool. As such, there may be tax implications. You should consult with a real estate expert to determine the estimated increase in value and property taxes. There may also be federal FHA programs to guarantee certain types of improvements. Energy efficiency, improvements in plumbing and safety improvements are just a few changes that may be applied to FHA loans. In any case, your lender, particularly if it is a bank, will need to code your loan appropriately. State the precise reason you are seeking a loan including any quotes you have received for the improvements. At present until December 30, 2009 there are Federal Tax Credits of up to $1500.00 for home improvements that help save energy such as roofing, insulation in walls and attic, and energy efficient windows. Ask your accountant about these programs.

Submit Financial Statements

Your financial history and credit score will be scrutinized more closely when you seek an unsecured home improvement loan. You will need to show your credit history and explain any previous flaws, especially bankruptcies or defaults. Any bankruptcy should be at least 7 to 10 years old and late payments should be at least 2 years old. This should give them ample time to expire on your initial credit check. However, if they do come up, it is essential you can point to the exact circumstances that caused the default and show those circumstances have changed.

Provide Additional Information

Your income may come into play when you are seeking a home improvement loan. It is preferred that you have consistent employment history and best if you have been with the same employer for a few years. Showing your income has increased incrementally during your tenure will additionally help to validate your financial security. You will likely be required to submit character or other financial references if you have bad credit. Any third party lender who can attest to your ability to make payments is a good reference. If you have rented in the past, make payments on a personal loan, etc., that lender is a great resource to show you are credit worthy.

Negotiate the Terms

Once a lender has accepted your application, you will have to negotiate the terms of the loan. You will not get to choose your interest rate. You will likely have options as to the length of the loan and monthly payments, however, which may raise or lower your interest rate accordingly. This is the appropriate time to discuss fees and penalties. Ask what will happen if you decide to pay your loan off early, move out of your home prior to completing renovations, or refinance down the line. These factors will greatly impact the total equity you have in your home when it is time to leave. The goal of any home improvement loan should be to increase your equity and enjoyment of your property, so protect this goal from the onset.

Secured Home Improvement Loans

Secured Home Improvement Loans include Bank Financing, FHA Title 1 and FHA home improvement loans, and Finance Companies. There is also some private and “Hard Money” available for financing a home that needs extensive repairs where the buyer wants to finance the work involved in getting the house into shape for renting or a personal residence.

BANK financing will require excellent credit and will involve financing the desired home improvement only with no cash out to the borrower. The Contractor who is going to do the work will have to qualify with the bank as well as the homeowner for this reason most Contractors do not offer it at present. It is an incentive for the homeowner to contract with the Contractor who offers attractive terms rather than have to pay off the work for all cash as it gives the homeowner some leverage and the ability to use his cash elsewhere. Interest rates vary and some reflect the present economy by charging more than conforming mortgage or equity loan rates as the amounts are generally much smaller that the former types of loans. The rates are similar to credit card rates or personal loan rates even though the added security adds more availability to a larger group of borrowers.

FHA financing is versatile and can accomodate a broader group of homeowners including those who do not yet own the property. An FHA 203 (k) allows the borrower to finance his improvements using the after repaired value up to 110% LTV (loan to value ratio). The US Dept of Housing and Urban Development (HUD) has a program where you can buy a house needing minor to extensive repairs with $100 DOWN and using an FHA loan for the balance.

FHA lending for home improvement projects only are available to homeowners with very good credit, usually a 640 credit score, income documentation and an approved State Licensed Building Contractors written agreement detailing the scope of the work.

Refinancing one’s existing mortgage is also available for homeowners who want the flexibility to choose any available Contractor, to do the work themselves, or act as the Contractor and supervise the work themselves. The borrower choosing this option should have sufficient equity to allow the amount of the payoff of the existing mortgage, the amount of the home improvements, closing costs, tax and insurance escrows if required and a 10-30% additional equity cushion which will be at the discretion of the lender. Current appraisals have often been lower than expected with the new HVCC guidelines for appraisers.

The Contractor

An approved licensed General Contractor will be utilized in all cases where the lender requires. Ask for one that is qualified by filling out the form below.