How to Get a Home Improvement Loan in 4 Easy Steps

A home improvement loan is a type of personal loan used specifically for home renovations or related expenses. You can get a home improvement loan from banks, online lenders and credit unions. Although some may not have them labeled as such, most allow you to use a personal loan to cover the cost of the renovation.

The application process is relatively quick, especially if done online. Unlike home equity loans, personal home improvement loans are often unsecured and based solely on your credit profile. Those with excellent credit and a steady income are the most likely to be approved, but some lenders target applicants with poor credit.

How to get a loan for home improvements

To increase your chances of approval, follow these steps when applying for a home improvement loan.

1. Shop around for rates

Once you know what type of loan you need, compare lenders to get the best home improvement loan. Consider interest rates, credit requirements, fees and loan terms. These all affect the total cost of your loan.

The maximum amount you can borrow should also be a factor in your decision. A credit card is probably not enough if you need to finance a major renovation or project. If this is the case, a loan that taps into your home equity — and gives you a decade or more to pay it off — will be the better choice in the long run. Likewise, a small project can be financed with a credit card you already have, if taking out a new loan doesn’t make the most sense in the given situation.

2. Gather documentation

Almost every lender has the same general requirements. Before you can get started, you’ll need to provide some basic information about yourself, including:

• Copy of a valid ID, such as a driver’s license or passport.
• Proof of income, such as pay stubs or tax returns.
• Proof of residence, such as your utility bills or bank statements received at your address.

Your current debts, home payments, and overall income can also affect the rates and terms you qualify for, so keep this information handy. Compare lenders and research their unique application and documentation requirements to make this process as painless as possible.

3. Get prequalified

Take advantage of lenders that offer a prequalification process. This will give you a quote that allows you to preview your chances of approval, the predicted interest rate, and the total cost of your home improvement loan. Plus, prequalification doesn’t require a hard credit check, so you don’t have to worry about it impacting your credit score when you’re shopping for the best rate.

You can apply for prequalification from multiple lenders at the same time to simplify the comparison process. This way you can see how much you can borrow, what it will cost and whether it will cover your project, without having to sign official papers.

While it’s always a good idea to pre-qualify, it’s even more so if you have bad credit. Rates for bad credit loans are often higher than rates for those with better credit profiles, so finding the best deal is especially important.

4. Complete your application

Once you’ve compared lenders, you should start the official application process with your top choice. Online lenders – and most banks – have an online application, but some banks or credit unions may require you to complete the process in person or become a member first.

If you are approved, your lender will send you the final documents and loan agreement. Read the agreement carefully before signing it. Make sure you are aware of all costs charged and that there are no administrative errors.

Once you sign the loan documents, the lender will deposit the money into your chosen bank account. You can then spend the money when you need it and start paying according to your repayment schedule.

Home Improvement Loan Requirements

Each lender has its own eligibility requirements, which can also vary depending on the type of home improvement loan you apply for. That said, these are some common factors to consider.

• Good credit score: According to FICO, a good credit score is a credit score of 670 and above. Some lenders offer loans to borrowers with lower credit scores. However, these loans typically have higher interest rates and fees than average.
• Low debt-to-income ratio (DTI): Your DTI ratio measures how much income you have left after paying your monthly obligations.
• Fixed source of income: You will be asked for proof of income, such as pay stubs, bank statements, W-2s, or tax returns. Some lenders may also have a minimum income requirement.

In addition, you must have a valid bank account and be a U.S. citizen or permanent resident to apply for most home improvement loans.

Choosing a home improvement loan

Home improvement loans are good if you have a smaller to medium-sized project that will increase the value of your home. They’re also a financing option if you’re strapped for cash and need to make an unexpected repair that isn’t covered by your homeowner’s insurance, or that you need to cover before the insurance payout comes through.

For larger projects, such as a complete kitchen renovation or adding insulation to an old house, consider the monthly costs and whether you can reasonably afford the loan. Look at your future financial goals and your current situation to make an informed decision.

However, if after crunching the numbers you realize the payments are restricting your budget too much, it might be better to wait. If possible, focus on lowering your overall loan costs by taking steps to improve your credit, finding an alternative financing option, or asking a family member or friend to co-sign the loan.

Alternatives to a home improvement loan

Besides personal loans, there are five main options for financing home improvements, each with its own pros and cons.

• Credit cards: If you have an ongoing home improvement project that you don’t necessarily have a budget for, a credit card can be a great solution because it offers a spend-as-you-go approach. But credit cards have higher interest rates than personal loans and mortgage loans, so it’s best to pay them off in full each month rather than carrying a balance.
• Mortgage loans: With a home equity loan you can borrow up to 85 percent of your equity in one go, comparable to a personal loan. But unlike a personal loan, mortgage loans are secured by your property. This means lower interest rates, larger loan amounts, and the risk of bankruptcy if you default.
• Home equity lines of credit (HELOCs): These also use the equity in your home as collateral, but function more like credit cards. If you have a series of projects with variable budgets, a HELOC can be a good choice to keep things flexible. Additionally, you typically only make interest payments during the drawdown period, which can keep costs low.
• Cash-out refinancing: Another option if you have significant equity in your home is a cash-out refinance. Essentially, you replace your current mortgage with one for more than you owe and pocket the difference. This is only a good idea if the costs are minimal and you can stay at your current rate or get a lower rate – and even then it may not be best for your situation.
• Government support: In some cases, you may want to look into government programs such as the Department of Housing and Urban Development (HUD) Title I Real Estate Improvement Loans. These programs can help you renovate your home for next to nothing, if you qualify.

Do your research to determine which option best suits your needs and fits your budget. Because every home improvement project is different, you should make the decision based on how much you have to spend and how flexible your costs are.

The bottom line

The application process for a home improvement loan is similar to any other personal loan. You’ll need to provide some basic information to ensure you meet all the lender’s requirements when you apply.

Before you apply, compare the different types of home improvement loans and lenders to make sure you get a loan that fits both your needs and your monthly budget.

Frequently asked questions

• What is the average term of a home improvement loan?

  Because a home improvement loan is a type of personal loan, the average term ranges from about two to five years. Some lenders have specific personal loans for home improvements, which can last between two and twelve years.

• How much does a home improvement loan cost?

  Depending on the lender, home improvement loans range from as small as $1,000 to $100,000. APRs are based on creditworthiness and range from approximately 8 percent to 36 percent. Most also come with fees and associated charges that increase the overall cost of borrowing, including an origination fee. These fees are typically deducted from the loan proceeds and range from 1 percent to 12 percent. To best estimate what a home improvement loan will cost, pre-qualify with several lenders and use a loan calculator.

• What happens if you use a renovation loan for something other than renovation?

  Unsecured home improvement loans can be used for almost any legal purchase. However, check with the lender before taking out a loan; some have specific usage restrictions.