Home Improvement Loans

A home improvement loan is money borrowed for the purpose of altering a home in some way. For example, basement refinishing, putting in a new kitchen, repairing a hole in a roof and adding a swimming pool are all examples of home improvement expenses for which a loan may be necessary. Some places (such as Home Depot) may offer loans specifically for home improvements. But most of the time, a borrower will fund home improvement expenses using either a personal loan or a home equity loan.

You can use a personal loan for almost any expense. And home improvement costs are no exception. If you are approved for a personal loan, you will receive a lump sum of money that you can use to pay for your project(s). After that, you will need to make monthly payments until the loan is paid off with interest. Personal loans range from as small as $1,000 to as large as $100,000. So you should be able to find some that will cover almost any home improvement expense you're planning. Depending on your credit and income, among other considerations, you can expect APRs ranging from 6% to 36%. And payoff periods range from 12 to 60 months (occasionally 84 months or longer).

Another way to get a home improvement loan is by tapping in to your home's equity. As with a personal loan, a home equity loan provides cash up front and requires monthly payments. But unlike personal loans, which usually have no collateral, home equity loans use your house as collateral. That means there's a risk of foreclosure if you fail to pay back the loan. Because of this collateral, home equity loans have the potential to be cheaper than personal loans, with APRs around 4% to 8%. In addition, you may be able to borrow larger amounts of money because the maximum loan size is tied to your house's value (minus the mortgage balance).

A home improvement loan usually requires a credit score of at least 660 if it's a personal loan, though some lenders work with people who have lower scores. If your home improvement loan is a home equity loan, you'll typically need a credit score of 680, according to Experian.

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:

1. 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.
2. Approval: Lenders should usually come to a decision within 7 business days of receiving a personal loan application.
3. 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.
4. Home improvement: The borrower can used his or her personal loan to purchase the home improvement goods and services needed to complete the job.
5. 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.

The biggest differences between a home equity loan and a home improvement are that borrowers can get more money, lower interest rates and longer payoff times with a home equity loan, but they have to use their home as collateral. In contrast, the term “home improvement loan” generally refers to an unsecured personal loan used for the purpose of home improvement. Most personal loans can be used for any purpose and do not require collateral.

Home equity loans also can be used for anything (including home improvement). But unlike the majority of personal loans, they are secured. If you fail to pay back your home equity loan, it's possible the lender could foreclose on your house. Because of this, home equity loans are riskier for borrowers than personal loans for home improvement.

Home equity loans have the potential to be larger than personal loans, however. The amount you can borrow is based on your house's market value minus the amount left to pay on the mortgage. You likely won't be able to borrow 100% of your house's equity, though. The lender will set a percentage.

Home equity loan vs. home improvement loan:

Home Equity Loan or Home Improvement Loan: Which is Better?

• Home equity loans are better if you're looking for the lowest interest rates, very long payoff periods, and especially large loan amounts.
• Home improvement loans are better if you don't want to put your home at risk, you have little equity in your home, or you need funding quickly.

Both types of loans are good for paying off home improvement expenses. But personal home improvement loans are definitely the less risky option.

The minimum credit score for a home improvement loan is 660 for most lenders. Lenders typically don't offer “home improvement loans” in particular. Rather, they offer personal loans that can be used for almost any purpose, including home improvements. And most personal loan providers require a credit score of 660+. That's not too difficult to attain, either – it's within the fair credit range and below the average American's credit score.

However, not all lenders look for a credit score of 660 or better. Some are more stringent, with a minimum score of 680-700. Others are more lenient, and will accept scores as low as 585-600. And you may be able to get a home improvement loan with even lower scores if you get a secured personal loan. Secured loans tend to not have a minimum credit score at all. That's because they require collateral, which the lender can take possession of if you don't pay back the loan. There's very little risk for the lender, so they can afford to accept people with bad credit.

Another way to get a home improvement loan is through a home equity loan or home equity line of credit. The average credit score needed for home equity loans and lines of credit is 680, according to Experian, though it may be possible to get approved with lower scores. Your chances are best if you have a score of at least 700.

If you don't know what your score is, you can check your latest credit score for free. But your credit score isn't the only factor that goes into approval for a home improvement loan.

To get the best sense of your odds, try using WalletHub's free pre-qualification tool to see which lenders offer good chances of acceptance.

There are plenty of home improvement loans with no equity needed. Only home equity loans and home equity lines of credit require the borrower to use the equity in their home. The best way to get a home improvement loan with no equity is by applying for an unsecured personal loan. Personal loans base eligibility on your credit and income, so you don't need to own property worth a certain amount of money to take one out. And you can use personal loans for home improvements or pretty much anything else. That's not your only option, though.

How to Get Home Improvement Loans with No Equity:

• Take out an unsecured personal loan. You'll usually need a credit score of 660+ to get an unsecured personal loan, but some lenders accept applicants with scores as low as 585. These loans have absolutely no collateral.
• Get a secured personal loan. If you're willing to put up something other than your home as collateral (e.g. a car, stocks, or money in a bank account), you can take out a secured personal loan even with bad credit. These loans tend to have lower APRs than unsecured personal loans, but if you default the lender can keep your collateral.
• Get a government-backed home improvement loan. The government offers a few loan options that don't require any equity. The U.S. Department of Housing and Urban Development helps insure property improvement loans of $7,500 or less. These are called FHA Title 1 loans. If you're a veteran, you can also look into a renovation loan through the Veterans Administration.

All in all, if you don't have any home equity, there are still plenty of avenues for you to pursue. A personal loan is probably the most convenient.

However, there are both pros and cons to getting a home improvement loan with no equity. The biggest benefit is that you won't risk losing your home because you won't be able to secure a loan with it. You'll also likely get quicker approval and funding timelines if you apply for a personal loan rather than a home equity loan.

Drawbacks to getting a home improvement loan with no equity include the fact that you may not be able to borrow as much as you could with a home equity loan. You'll also likely have much higher APRs if you get your home improvement financing through a personal loan rather than a home equity loan.