How to Get a Loan for a Home Improvement Project: A Step-byStep Guide
A home improvement loan can help you turn your house into your dream home without draining your savings. Whether you're renovating a kitchen, finishing a basement, or making energy-efficient upgrades, here are multiple options to review for funding a home improvement project with a loan.
1. Understand the Types of Loans for Home Improvement Projects
Loans for home improvement projects are financing that can be used for renovations or repairs. There are several types of loans that can help provide funding for your home improvement project:
- Personal Loans: Typically, fixed-rate personal loans which generally do not require home equity valuations, but other collateral may be required for secured personal loan
- Home Equity Loans: Lump-sum, secured loans using your home’s equity (equity refers to the amount of a home’s value that you’ve actually paid off or gained)
- Home Equity Lines of Credit (HELOCs): Revolving credit lines based on equity
- Cash-Out Refinance: Replaces your mortgage with a larger one and gives you the difference in cash
- FHA 203(k) Loans: Government-backed loan that finances the purchase and/or repairs of a home
2. Assess Your Financial Situation
Before applying for the type of home improvement loan you want, you may want to consider your:
- Credit Score: A higher score can help you access better rates and terms — learn what a “good ” credit score is
- Debt-to-Income Ratio (DTI): Debt-to-income ratio is a measure of how much you owe each month compared to how much you earn; every lender has a different threshold; a low DTI signals to lenders you can afford to take on additional payments
- Income Stability: Lenders want to see steady employment and income to assess the likelihood that you’ll be able to make your monthly payments
- Home Equity: For secured loans, you’ll need sufficient equity; unsecured loans do not require equity unless you choose to take out a fixture-secured loan
3. Gather Documentation
To speed up approval, gather your documents ahead of time. You’ll want to have at least these documents on hand:
- Government-issued ID
- Proof of income (W-2s, pay stubs, tax returns)
- Contractor estimates, if applicable
- Mortgage or deed documents if applying for equity-based loans
4. Shop Around and Prequalify
Get quotes from banks, credit unions, and online lenders. Prequalifying generally lets you check rates without impacting your credit score. It also allows you to:
- Compare offers side by side, including terms, APR, and interest rates
- See your monthly payment estimates
- Understand the total cost of borrowing with each lender
5. Submit Your Application
Once you’ve chosen a lender, it’s time to submit your application. Completing the loan application can typically be done online, but some may require you to do so in-person. Submit the required documentation and wait for approval. This could take hours or days, depending on your loan provider. In most cases, once you accept the loan terms, you’ll receive your home improvement loan funds.
6. Use Money Responsibly
Once approved, use your home improvement loan strictly for the intended purpose. Keep receipts and invoices for tax and/or refinance purposes. When making home upgrades, consider projects that:
- Increase home value, like kitchen or bathroom upgrades
- Improve energy efficiency, like windows and insulation
- Address safety or structural issues
Focusing your improvements on projects like these ensure you’re using the money responsibly and may even benefit you down the line.
Common Mistakes to Avoid
Like any credit product, a home improvement loan requires you to make some financial choices, some of which can lead to mistakes if not thought out properly. Make sure to avoid these when applying for and using a home improvement loan:
- Borrowing more than you need
- Ignoring total loan cost, or APR (Annual Percentage Rate), which includes interest and fees
- Choosing a loan with prepayment penalties
- Using short-term loans for large, long-term projects
Final Thoughts
Getting a home improvement loan doesn't have to be complicated. By understanding your options, knowing your credit score, and comparing lenders, you can fund your home renovation project without financial stress.
Need funding for your next renovation? Explore home improvement loans through Upgrade and see if you prequalify with no impact on your credit score.
