Home improvement loans give homeowners the funds needed to complete projects related to maintaining or increasing the value of a home and the surrounding property, such as remodeling a room, putting on a home addition, or replacing a roof. Although they have a unique purpose, loans for home improvement function just like most other loans. The borrower receives a lump sum of money and must pay it back, along with interest, over a certain number of months.
Most lenders actually don't differentiate home improvement loans from their other personal loans. Personal loans can typically be used for any purpose, including home improvement. Some lenders, such as LightStream, give specific interest rate ranges for home improvement loans versus other types of personal loans. But they are not common.
The interest rate on a home improvement loan depends on the borrower's credit and income, among other factors. And the lender may charge additional fees, such as an origination fee for processing the loan.
How home improvement loans work:
- Application process: Before applying for a personal loan for home improvement, it's good to check for pre-qualification to see approval odds and estimated rates. Borrowers can do that with WalletHub's free pre-qualification tool and then apply for the loan on the issuer's website.
- Approval: Lenders should usually come to a decision within 7 business days of receiving a personal loan application.
- Loan funding: The lender gives a lump sum of money to the borrower, usually as a direct deposit to a bank account but sometimes as a check. It typically takes only a few business days after approval to receive the funds.
- Home improvement: The borrower can used his or her personal loan to purchase the home improvement goods and services needed to complete the job.
- Payoff: The borrower must make a set minimum payment each month until the loan is paid off. The total cost of the loan will include interest and any applicable fees.
It's useful to note that while most “home improvement loans” are just personal loans used for the purpose of home improvement, there are other types of loans you can use for home improvement as well.
Another type of loan commonly used for home improvement is a home equity loan. Like a personal loan, a home equity loan can be used to pay for just about anything. The difference is that with a home equity loan, your home serves as collateral and could be foreclosed on by the lender if you default. But that risk comes hand in hand with the benefits of low APRs and the potential for large loan amounts.
There are also home equity lines of credit, which don't give you a lump sum at the beginning but let you withdraw up to a certain amount whenever you want, like a credit card.
Finally, you might consider getting a government-backed loan for home improvement. The Federal Housing Administration offers “Title I” loans, which can be used for anything that makes your home “more livable and useful.” The loan is usually secured by your house if you borrow more than $7,500 and unsecured otherwise. The payoff period is 20 years for a single-family house, and you'll need a debt-to-income ratio of 45% or lower to qualify. Other government-backed options for home projects include Energy Efficient Mortgages for improving the home's energy use and Single Family Housing Direct Loans from the USDA for people in rural areas. The latter can be used to either purchase a home or renovate one.