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Published: Aug 19, 2022 19 min read
Janice Chang for Money

Home improvement projects can increase the equity in your home and improve your quality of life. Each of these pros is hugely important, and so is the actual process of financing your home renovation.

Home improvement loans work in different ways and can serve different functions. There are government-backed programs, loans that require home equity, and more general financing options, such as a personal loan. Your home is an investment worth preserving, but so are your finances. That’s why we’ve created this guide; read on to learn about how to get a home improvement loan that meets your needs.

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Types of home improvement loans

There are several home improvement loan options to consider, each with a specific set of restrictions and criteria for approval. Additional costs beyond the interest rate, like down payments, origination fees, the price of a home appraisal or prepayment penalties, also vary.

Listed below are the top types of loans to consider when financing a home renovation project.

FHA Loans - An FHA Loan is insured by the Federal Housing Administration, which means the approved private lenders who issue the loans are more likely to offer lower interest rates and more favorable loan terms overall. While there’s several kinds of FHA Loans, the two most commonly used for home improvements are the Title I Property Improvement Loan and the 203(k) Rehabilitation Mortgage.

HELOCs - A Home Equity Line of Credit is a secured loan borrowed against the equity in your home, and there are no restrictions on how you can use the funds. Lenders will consider the equity in your home and your ability to repay in deciding approvals, amounts, terms and interest rates. However, HELOCs are not lump-sum loans. Find out more about how the kind of home improvement loan works in our HELOC guide.

Home Equity Loans - Often referred to as a “second mortgage,” a Home Equity Loan is a secured, lump-sum loan with a fixed interest rate and a monthly payment plan that typically starts within 30 to 60 days from closing. (There are some lenders with repayment terms that allow for interest-only payments until the loan term ends, when a full repayment will be due.) Learn more about Home Equity Loans and the criteria lenders consider for approval in our Best Home Equity Loans guide.

Personal Loans - You can use most unsecured personal loans for virtually any purpose, and that includes home improvement projects. Lenders consider your credit score and credit report for approval, what annual percentage rate you’ll be offered, and other loan terms. Home equity won’t be a factor in a personal loan. Read our reviews of the Best Personal Loans to find out more.

Cash-out Refinance - Through the cash-out refinancing process, you get a new loan with new terms, and your lender pays you the difference between the two, minus any fees (e.g. origination or closing). To qualify for a cash-out refinance on your current home loan, lenders typically require a loan-to-value (LTV) ratio of no more than 80%, and a debt-to-income (DTI) ratio of 50% or less. Read our guide to cash-out refinance to learn how this kind of financing works.

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Steps for getting a home improvement loan

Before jumping into borrowing, make sure your home renovation plans and budget are worked out in detail. Defining your goals and needs will help you know you for sure when you’ve found the best home improvement loan offer for you.

1. Identify your finances

Before applying for any kind of home renovation loan, you should have a solid understanding of where you’re at financially. Borrowing beyond what you can feasibly repay could have negative economic consequences in the long run.

Below are some of the boxes you’ll want to tick when evaluating financial readiness:

  • Can you afford to take on more debt? - Credit cards, medical bills, student loans or any other payment obligations won’t be paused during the repayment period of your home improvement loan.
  • How healthy is your credit score? - If you have excellent credit, it’s more likely you’ll get approved for a loan with an interest rate on par with current market standards. You can check your credit report online for free. You can also try to repair your credit if you believe your credit report isn’t accurate.
  • Do you have an emergency fund? - It’s recommended that every person have an emergency fund that can cover three to six months’ worth of expenses. If your savings doesn’t fall somewhere within this minimum range, you might want to focus on saving before adding loan payments to your list of debts. Unfortunately, it’s always possible that your economic situation could change for the worst, and dipping into your savings to pay debts isn’t ideal.
  • Do you have equity in your home? - Depending on the type of home improvement loan you want, the equity of your home may play a major role. You can estimate your home equity by looking up the value of your home according to current market standards — try Zillow or contact a real estate agent — then subtracting the amount left on your current mortgage.
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2. Tailor your home improvement plans to fit your budget

If your budget is tight, consider reworking your plans. Stagger your project as best you can, taking on one piece of the overall project at a time. This way, the loan you need will be smaller, and you’ll minimize your financial risk.

Nobody wants to downsize their home improvement plans for lack of money. However, borrowing outside your means, whether by committing to a high interest rate or expensive monthly payment, is an extreme risk, especially if your home is the collateral for your loan.

3. Research the types of loans available

When researching which home improvement loan is right for you, consider these metrics:

  • Home equity - Calculate the equity in your home to find out if you qualify for renovation loans that require a certain percentage of home equity.
  • Credit report - Some home improvement loan lenders specify a minimum credit score for eligibility.
  • Credit history - If you have any recent bankruptcies, repossessions, or delinquent accounts, this could affect your approval odds with many loan lenders, even if these negative marks aren’t currently dragging down your credit score.
  • Loan fees - Processing (also known as origination) fees, closing costs and prepayment penalties are typical of any loan. However, home improvement loans often carry additional costs, such as the cost of a home appraisal, title search or a fee to record the new lien on your home (paid to your local tax office).
  • Loan amounts - The maximum loan amount is decided by the lender and varies by loan type. Whether or not you qualify will depend on the loan lender’s borrower criteria.
  • Restrictions on funding use - All home improvement loans work differently. Some lenders require you to use the money only for renovations, and others place limits on the types of work permitted.

Research loan requirements

Compare requirements across loans to estimate your odds of approval and gauge whether the loan type is right for you.

Look for these requirements:

  • Credit score minimum - Many lenders require credit scores in the high 600s or better.
  • Income requirements - Loan lenders will often consider your income in determining the likelihood that you’ll repay the loan, which can affect your potential for approval.
  • Residency requirements - Some home renovation loans are only available to homeowners who have lived in the residence for a minimum number of months.
  • Collateral - In most cases, a lender will require a second lien on your home as collateral for the money borrowed. (One exception: unsecured loans of less than $7,500 through the FHA Title I Home Improvement Loan program.)
  • Home equity - For loans that require home equity, the lender sets a certain amount as a requirement for qualifying.
  • Repayment terms - The process of repayment is different for each loan. It’s possible your loan won’t require any payment for the first 30 to 60 days. Other loans may offer interest-only payments for a set amount of time.
  • Homeowners insurance - Home renovation loans often require proof of insurance. Others also require flood insurance.
  • Contractor agreement - Lenders offering loans designated specifically for home improvement may require a copy of your contractor agreement and construction plans.

Identify loan fees and long-term costs

Not all home improvement loans carry the same fees. Here are some to look out for:

  • Origination or processing fees
  • Document preparation fees
  • Credit report fee
  • Home appraisal fee
  • Title search fee
  • Notary fee
  • Annual fee (also known as a “maintenance fee”)
  • Closing cost
  • Prepayment penalties

Consider non-loan funding sources

If the loan amount you’re approved for doesn’t fully cover your home improvement plans or you’re not offered the lowest rates, you might want to consider other financing options. Think about the possibility of borrowing from family and friends, saving money for your project (consider a high-yield savings account) or using a credit card for small repairs or minor upgrades and remodels. See our list of additional funding options for more.

3. Gather your documents

The documentation required will be clearly stated in the loan application. However, there are some items that are pretty standard:

  • Government-issued photo ID
  • Social Security number
  • Evidence of income via tax returns and recent pay stubs
  • Employer contact information
  • Proof of residence (e.g. utility bills mailed to your address)

Remember that for some types of loans, especially those designated specifically for home renovations, lenders will ask to see a contractor agreement. Be sure to have this information readily available.

4. Apply for a loan

You’ve comparison-shopped and prequalified for an offer: now it’s time to start the application process.

The steps can differ by loan type, but generally, you can expect to:

  • Fill out the online lender’s application via the form on the lender’s website
  • Provide all necessary documents, such as income documentation and contractor plans
  • Approve the interest rate and loan terms offered
  • Submit additional documentation as per lender requirements
  • Review and sign the loan closing terms
  • Pay upfront closing costs, if applicable
  • Receive funds via agreed-upon method of payment, e.g. bank account

How to finance your home improvement

Build up a savings fund

Paying for your home renovation project in cash is your safest best in terms of your financial future. Using cash minimizes your risk of being negatively impacted by factors like interest rate surges, home value depreciation or changes to your economic situation and ability to repay the loan.

Saving money requires frugality, patience and time, so this option is best for people planning home improvements that aren’t immediately necessary. If paying in cash sounds like the best option for you, try cutting costs wherever possible and set aside that money for your renovations.

You could also consider adding more to your savings through earnings from a high-yield savings account. More money could be moved to your renovation project funds by selling off stocks, crypto or other valuable assets you might have.

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Supplement the loan with a credit card

A credit card may come in handy in paying for your home improvement project if the loan you’ve acquired won’t cover all your home improvement costs. Remember that credit cards typically have higher annual percentage rates than loans, though, and you’ll have to repay what you spend in addition to repaying your home improvement loan.

If your credit score is healthy, try applying for a new credit card that offers 0% APR for the first year. This could help you avoid paying interest on money spent, so long as you pay off the debt before the promotion ends.

Cover repairs with a homeowners insurance settlement

Your home improvement plans could be paid for to some extent by your home insurance policy. Repairs to the structure of your home if damaged by severe weather events, fire, or theft, for example, may be covered by home insurance, though this depends on your specific policy terms. Flood or earthquake insurance, often offered by insurers as separate policies, may help cover costs of related damage. Coverage of personal property will depend on your specific policy, too.

The National Association of Insurance Commissioners reports that this process, from evaluation of the damage by an insurance adjuster to payment and repair or replacement, could take between 18 months to a year. However, some companies may operate more quickly. Review your policy and talk to your insurance representative to learn what options are available.

Consider contractor arranged loans

Some contractors offer financing to their clients via partner lenders. This could mean the contractor receives the funding and you pay the contractor directly or, more likely, they’ll connect you with offers from unsecured loan lenders. You can usually compare rates through a prequalification process that won’t affect your credit score.

However, because contractors often receive a commission in return for connecting clients to lenders, you should be wary of price-gouging. It’s not uncommon for contractors to overstate the cost of a home improvement project to convince homeowners they need more funding.

What to watch out for when applying for a home improvement loan

There's a good reason that both the U.S. Department of Housing and Urban Development (HUD) and the Federal Trade Commission (FTC) dedicate entire sections of their websites to tips and warnings for homeowners beginning renovation projects: If you rush through the process, a lot could go wrong. We’ve summarized the top tips below.

Understand your financing situation - Whether you opt for a federal loan, home equity loan, an unsecured personal loan, or any other kind of financing, ensure you’ve read the fine print and understand all fees and monthly payment obligations. Make sure you’re getting the best home improvement loan possible by comparing multiple offers.

Find a reputable contractor - A bad contractor could result in shoddy work, yet you’ll still have to pay off the home improvement loan. Protect your financial situation by vetting any potential contractor. Look to consumer protection agencies in your state and consumer review sites like the BBB or Trustpilot. Ask for proof of legally required certifications as well as certifications from industry-recognized organizations, like the American Institute of Constructors.

Avoid pushy contractors - The contractor may be the professional here, but you’re still the one paying for the home improvement project. Contractors sometimes push for renovations you don’t actually need or want to inflate costs, especially if they offer financing and get a commission in return.

Evaluate thoroughly your contractor agreement - All costs, including possible service charges, plus a payment agreement should be laid out plainly. What is expected of the contractor should also be detailed in your contract. Be sure you understand clearly your end of the deal, too. Don’t forget to make sure the agreement includes a completion certificate, which is required by most lenders once the work is finished.

Use caution in going DIY - Home repair how-tos are widely available on the internet, but a video tutorial doesn’t make you an instant master of any trade. Overestimate your ability to take on a complicated home improvement project and you might have to ultimately pay a professional to fix your mistakes.

How to Get a Home Improvement Loan FAQ

What type of loan is best for home improvements?

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The type of loan that's best for your home improvement project will depend on your plans, your budget and your credit score. Be sure to research multiple loan options once you've firmed up the details of your plans.

How much is a home improvement loan?

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The total cost of your loan will be determined by how much you borrow and the loan rates and loan terms set by your lender. However, when borrowing for a home improvement project, the loan itself isn't all you'll repay. You'll pay either a fixed-rate or an adjustable interest rate and will also likely be charged fees, such as an origination fee or loan closing costs. Do find out if interest payments are tax deductible: this could save you money.

What is the difference between a home improvement loan and a home equity loan?

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Home improvement loans usually carry restrictions for how you can use the funds. With a home equity loan, you aren't obligated to use those funds strictly for home improvements. Another difference: Not all home improvement loans require equity in your home, but a home equity loan (and this includes HELOCs) does require a certain amount of equity for eligibility.

What is the average interest rate on a home improvement loan?

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A credit score rated lower than excellent will likely result in a higher interest rate for an unsecured personal loan, but these loans don't require collateral. Secured loans do require collateral (e.g. a second lien on your home) but may offer better interest rates and more favorable loan terms. Still, the loan you're offered will vary by credit score; borrowers with excellent credit will be offered the best rates. Your credit report and, if applicable, the amount of equity in your home, are also considered.

With excellent credit, you might see low-interest rates that fall somewhere between 4% and 5%. However, higher interest rates are more likely, even if you have good credit. For bad credit borrowers, annual percentage rates can be as high as 36%, sometimes more.

How much can you borrow for a home improvement loan?

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Some lenders offer loans of more than $100,000, while others — like with the loans available through lenders approved and insured by the Federal Housing Authority — are capped at $25,000 to $35,000. Your creditworthiness and home equity will also likely factor into how much a home improvement loan lender approves.

Summary of How to Get a Home Improvement Loan

This article offers advice for acquiring a home improvement loan. Included in our guide are specifics about multiple types of home renovation funding so that homeowners can make an educated choice about which loan type is best for their situation. Possible loan requirements and fees, what to look for in a contractor and the standard steps of the loan application process are also detailed.

Our section on tailoring your home renovation plan to your financial situation may be helpful to homeowners on a tight budget. We’ve also included a list of non-loan funding sources for those who may not yet be ready to commit to a home renovation loan.

This guide shows how home improvement loans work differently, but by learning more about the options available, you may find financing that best meets your home renovation needs.