How to get a home improvement loan in 4 simple steps

A home improvement loan is a type of personal loan that’s used specifically for home renovations or related expenses. You can take out a home improvement loan from banks, online lenders and credit unions. While some won’t have them labeled as such, most will allow you to use a personal loan to cover the cost of the renovations.

The application process is relatively fast, especially when completed online. Unlike home equity loans, personal loans for home improvement are often unsecured and are based solely on your credit profile. Those with excellent credit and a steady income are most likely to get approved, but some lenders cater to applicants with bad credit.

How to get a loan for home improvement

To increase your approval odds, 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, borrower requirements, fees and loan terms. These will all impact the overall cost of your loan.

The maximum amount you can borrow should also be a factor in your decision. A credit card probably won’t be enough if you need to fund a large renovation or project. If this is the case, a loan that uses 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 could be financed with a credit card you already have if taking out another loan doesn’t make the most sense in the situation.

2. Gather documentation

Almost every lender has the same general requirements. You will need to submit a few basic pieces of information about yourself to get started, including:

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

Your current debts, housing payments and total income could also affect the rates and terms you qualify for, so have this information handy. Compare lenders and research their unique application and documentation requirements to make this process as seamless as possible.

3. Get prequalified

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

You can apply for prequalification with multiple lenders at one time to simplify the comparison process. This way, you can see how much you can borrow, what it will cost and if it will cover your project without having to sign any official paperwork.

While it’s always a good idea to prequalify, it is doubly so if you have bad credit. Bad credit loan rates are often higher than rates for those with better credit profiles, so finding the best deal is especially important.

4. Fill out your application

Once you’ve compared lenders, you’ll need to begin 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 that you complete the process in person or become a member first.

If you get approved, your lender will send you the final documents and loan agreement. Read through the agreement carefully before signing off on it. Make sure you’re familiar with every fee charged and that there are no clerical errors.

Once you sign the loan documents, the lender will deposit the funds into your chosen bank account. You will then be able to spend the money as you need it and will start making the payments as set by 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’re applying for. That said, these are some common factors to consider.

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

In addition to these, you’ll need to have a valid bank account and be a US 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 midsize project that will increase the value of your home. They’re also a financing option if you’re tight on money and have to make an unexpected repair that’s not covered by your homeowners’ insurance, or that you need to cover before the insurance payout comes in.

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

However, if, after crunching the numbers, you realize that the payments tighten your budget too much, it may be better to wait. If possible, focus on reducing your overall loan cost by improving 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

There are six common options to fund home improvements aside from personal loans, each with its own set of benefits and drawbacks.

• Credit cards: If you have an ongoing home improvement project for which you don’t necessarily have a budget, a credit card can be a great solution as they provide a spend-as-you-go approach. But credit cards have a higher interest rate than personal loans and home equity loans, so it’s best to pay them off in full each month rather than carrying a balance.
• Home equity loans: With a home equity loan, you can borrow up to 85 percent of your home equity as a lump sum, similar to a personal loan. But unlike a personal loan, home equity loans are secured by your property. This means lower rates, larger loan amounts and the risk of foreclosure if you default.
• Home equity lines of credit (HELOCs): These also use your home’s equity as collateral but function more like credit cards. If you have a series of projects with variable budgets, a HELOC may be a good choice to keep things flexible. Plus, you’ll typically make interest-only payments during your draw period, which can keep costs down.
• Cash-out refinance: 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 fees are minimal and you can stay at your current rate or get a lower one — and even then it may not be best for your situation.
• Government assistance: In some cases you may want to look into government programs, such as the Department of Housing and Urban Development’s (HUD) Title I Property Improvement Loans. These programs allow you to renovate your home for next to nothing — if you qualify.
• Savings: If you don’t qualify for government programs and prefer to steer clear of debt, you have the option to save up and cover the cost of improvements out-of-pocket. This approach could take a lot of time and effort, but you’re more likely to keep renovation costs manageable and avoid overspending. You can also move forward without having to worry about credit checks or credit damage from missed loan payments. But it also means you’ll have less cash on hand for other expenses that could come up.

Do your research to determine which option best suits your needs and fits your budget. Since every home improvement project is different, you will need to 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 submit some basic information to ensure you meet all the lender’s requirements when you apply.

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

Frequently asked questions

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

  Since a home improvement loan is a type of personal loan, the average length ranges from two to five years. Some lenders offer home improvement-specific personal loans, which can last between two and 12 years.

• How much does a home improvement loan cost?

  Depending on the lender, home improvement loans range from as small as $1,000 up to $100,000. APRs are based on creditworthiness and vary anywhere from around 8 percent to 36 percent. Most also come with fees and associated costs that increase the total 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 gauge what a home improvement loan will cost, prequalify with multiple lenders and use a loan calculator.

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

  Unsecured home improvement loans can be used for nearly any legal purchase. However, check with the lender before banking on a loan; some carry specific usage restrictions.