There are some key steps involved in getting a home improvement loan. From assessing your home improvement goals to signing on the dotted line, having all the details in place can help make the process smoother.
Step 1: Assess Your Renovation Needs
What are your home improvement goals? Perhaps you want to renovate and update your kitchen or your bathrooms. Maybe you want to expand the living space you have by building an addition to your house. Or you might be looking at smaller projects, like replacing your aging roof, installing solar panels or upgrading the HVAC system in your home.
Start the home improvement loan process by evaluating what your project goals are and figuring out your home improvement project costs. Research reputable contractors and meet with them to get estimates on your project. Having clear, detailed estimates is a great starting point for figuring out the cost of your home improvement project and deciding how you will fund it.
Step 2: Research Lenders and Loan Types
After you’ve determined how much money you’ll need for your home improvement project, familiarize yourself with the different home improvement loans available to determine what works best for you. Start with your existing lender to explore what options they offer for your loan amount. You can also ask friends and family for lender recommendations. Include both traditional and online lenders in your research.
Evaluate the different financing options available to you for your home improvement project. Popular home improvement loans include personal loans, as well as home equity loans and home equity lines of credit (HELOC).
A home equity loan gives you a lump sum payment with a fixed interest rate, while a HELOC allows you to borrow money multiple times from a maximum available amount, similar to a credit card. HELOCs usually have adjustable interest rates.
Both home equity loans and HELOCs are secured loans where you borrow money using your home’s equity as collateral. If secured loans aren’t repaid, you face serious consequences like the risk of foreclosing on your home. If you want to avoid this risk, you can consider a personal loan, which is an unsecured loan that does not borrow against your home.
Step 3: Check Your Credit Score
All lenders will use your credit score to determine the approval and terms of your loan. Lenders will look at items including your bill-paying history and if there are any late payments, the number and type of credit accounts you have, outstanding debt and any collection actions in your credit history. These components of your credit history will help a lender predict if you’ll repay a loan successfully and on time.
Make sure you check your credit score to see how it will affect the home improvement loan options available to you. Ideally, you’ll want to have at least good credit when applying for a loan in order to qualify for the best options and lower interest rates. Obtain a free copy of your credit report at AnnualCreditReport.com so you can check it and address any errors.
Step 4: Gather Necessary Documentation
Start collecting the required documents you’ll need to get a home improvement loan. These will include a valid ID like a driver’s license or passport, your Social Security number, proof of income such as pay stubs or tax returns, project estimates and information about the contractors who will do the work.
Have all these documents organized and readily available to help your home improvement loan application process run smoothly.
Step 5: Prequalify for Loans
Work with the lenders you’ve identified to get prequalified for your home improvement loan. It’s helpful to get prequalified with multiple lenders, as the costs and terms of the loans they offer may differ. There’s no penalty for obtaining multiple prequalifications for your home improvement loan. Prequalification also doesn’t involve a hard credit check, so it won’t impact your credit score.
A prequalification letter states how much a lender is willing to lend you, and up to what loan amount, based on certain assumptions. Prequalification is not a guarantee that you’ll get the home improvement loan, but it’ll give you an idea of what you can borrow. Follow up with the lender and ask questions about their prequalification process to help ensure there are no surprises later on in the loan process.
Step 6: Review and Compare Loan Offers
Once you’re prequalified for a home improvement loan, evaluate the loan offers and ask each lender to explain the specifics of their loan terms. One of the most important loan terms to understand is the loan’s annual percentage rate (APR). The APR is the total cost you pay for the money you’re borrowing, and a lower APR generally means a lower loan cost. APR includes the interest rate and can also include points, broker fees or other charges. Compare your loan offers for the best rates.
While some loans will have a fixed interest rate, other loans may have an adjustable interest rate. It’s critical to compare these carefully. A fixed-rate loan will likely have the same monthly payment for the term of the loan, while the monthly payment for an adjustable-rate loan will go up when interest rates rise. For an adjustable-rate loan, ask how your rate and loan payment will vary based on fluctuations in interest rates
