Wondering how to finance your home renovations? Finding lenders for home renovations is neither difficult or fraught with time-consuming strictures. With the explosion in the number of lenders providing packages that can be tailored to your specific needs, it’s nearly impossible not to find a match. The loan industry has expanded aggressively in the past twenty years, so take advantage of that.
The biggest challenge is loan shopping to find the best fit, then finding the lender best able to provide that loan. How to finance your home renovations boils down to three important factors:
If you tackle these aspects of a home renovation loan first, all else will follow seamlessly.
Whether you are going in alone as a DIY home-owner, or are using a contractor to perform the work, an honest, realistic appraisal of the money needed is imperative. Lenders can be a little sticky about these numbers, so pay attention. If you are going the DIY route, make a complete list of all the materials needed, their cost and quantities. Add between thirty and thirty five percent to that number to include your labor, time, delivery costs and padding for mistakes. If you are using a contractor, get their exhaustive list of materials and labor, add ten percent for mistakes and present that to your lender. Include photocopies of essential documents to add veracity to your requests.
Your credit rating will determine loan amounts, interest rates and strictures on the loan. The best loans and interest rates will go to a borrower with an A rating. Don’t be discouraged though, an A rating is not that hard to obtain. An A rating means you have no late payments within the last 12 months and no current maxed-out credit cards. When thinking about how to finance your home renovations, obtaining an A credit rating takes little time and less effort, so get yourself to that place quickly.
Another factor determining the amount of money you can borrow is your loan to value ratio. If your home is worth $200,000, a lender is allowed to loan up to 80% of the home value for your renovations. $160,000 can buy a lot of renovations. You may not get that much, but LTV ratio gives you a rough idea of what you can expect. Base income and money owed on bills also affect the amount you can get from a loan company.
As indicated before, this is the hard part. There are so many options, you have to be able to choose the best one for you. Here are the top three:
You are borrowing against the value of your home, the lending agency uses your house as collateral. You do get all the money up-front, with a structured re-payment program in place. Make sure you get a fixed rate repayment plan, variable rate plans can spell disaster down the road. Interest rates (depending on the area) can be slightly higher, make sure this is the right loan for your house renovations.
You can refinance your old mortgage and combine it with an FHA 203k loan covering the cost of the house renovations for a new mortgage. Your equity and amount borrowed can be higher because of the loan structure. 203K loans tend to be slightly less than average, but the interest rates are also lower.
These are perfect for homeowners with less than stellar credit ratings. You will be offered less money and a higher interest rate so beware of how much money you are borrowing. Consider a B&C loan for a small renovation at first, while you get your credit in shape in order to apply for a more conventional loan later on.
Again, you have some legwork to do here. You have the essential information lined up, now focus on the lender most willing to work with you. The obvious things apply. Who is the most willing to work with you and treat your home renovations with the most respect? Who offers the best rates and the best loan amounts? Don’t be locked into regional or hometown lenders strictly, many aggressive loan companies have nationwide charters and are willing to fight for your business. With the amount of mortgage companies out there looking for your custom loan, this is a matter of taking the time to contact all of them and see what they have to offer.
When the time comes for home renovations, be prepared to do your homework. Getting the best loans and rates depends on your attention to detail and your needs. This is big finance, you don’t want to make mistakes with your estimates, loan package, or lender. The FHA 203k program offers many advantages and rewards, but like any loan program there are some confusing aspects involved with it, so don’t feel like you have to navigate the process alone.