How to Apply for a Home Renovation Loan

A home renovation loan is exactly what it sounds like – a loan specifically designed to help homeowners and potential buyers renovate a house to make it livable. There are millions of homes on the market that could use a little TLC, but many home buyers lack the direct funds to pay for it.

An FHA 203k loan, for example, gives buyers the money they need to purchase a home that requires some improvements. Mortgage lenders bundle the price of a home plus the cost of renovation into one easy-to-handle home loan. This makes it easy for buyers to qualify for a home loan while saving money on interest.

Did you know that home improvement loans with bad credit are not impossible? In the past, borrowers needed excellent credit and a hefty down payment to purchase a house, even one that needs some fixing. Nowadays, even borrowers with poor credit can qualify for a loan. Continue reading below to learn how to apply for a renovation loan.

What is a home renovation loan?

The term home renovation loan refers to a loan specifically geared toward renovating a house. Some types of renovation loans include both the purchase price of a home and the cost of pre-determined renovations. Other loans only cover the cost of improvements and are not meant for any home buying or selling transactions.

The FHA 203k loan is one of the most common types of loans for homebuyers itching to purchase a fixer upper. Thanks to a few popular television shows, this trend is spreading like wildfire throughout the U.S. The idea of buying a home in need of cosmetic repair and making it one’s own is quite appealing.

Home renovation loans like this one are offered by various types of lenders. However, the FHA’s version of a home improvement loan is secured by the federal government. This means that financial lenders take less risk when giving out loans to homebuyers because they are covered by the government in case of default.

Some homeowners may be interested in refinancing their houses that are in need of a few repairs. A home improvement loan may be the solution for them as well. Many lenders provide renovation loans for purposes of refinancing, which can help the buyer lower their interest and get a better loan term.

Government Home Renovation Loans

Some home renovation loans are offered, secured or backed by the U.S. federal government. Government-backed loans make it easier for lenders to provide funds to an array of applicants, even those with poor credit. If the borrower stops paying the loan, the government pays the remaining balance to the lender.

One of the best home improvement loans backed by the government is the 203k loan. The FHA 203k loan is provided by the Federal Housing Authority and the U.S. Department of Housing and Urban Development (HUD). To qualify, borrowers (and the house in question) must meet certain criteria:

  • Cost of rehabilitation must be at least $5,000
  • Total value of the home must fall within FHA mortgage limits for the area
  • Borrower’s credit score must be at least 620
  • Loans must be secured by an FHA-approved lender

Another type of home renovation loan offered through a government program includes the Section 504 Home Repair program. Low-income homeowners can qualify for this program to pay the cost of repairing, modernizing or removing hazards from their home. Elderly homeowners are eligible for home repair grants as well.

In order to qualify for the Section 504 Home Repair loan program, homeowners must meet the following eligibility criteria:

  • Be the homeowner and occupy the home
  • Have an income below 50 percent of the median area income

To receive a grant, homeowners must be at least 62 years of age and be unable to repay a repair loan. The maximum home repair loan amount is $20,000, while the maximum grant amount is $7,500. Grants do not need to be repaid; loans may be repaid within 20 years and are capped at a one percent interest rate.

Application Process for a Home Renovation Loan

Home renovation loans, regardless of the amount or type, are generally accompanied by a thorough application process. Mortgage lenders must be sure that applicants fit all the criteria before approving their loan. As such, the process can be quite lengthy.

The first step toward getting a home renovation loan is finding a mortgage lender. Homebuyers interested in the FHA 203k loan must find a lender that is approved by the FHA. Only FHA-approved lenders are qualified to provide this type of loan.

The HUD lender list search page allows homebuyers to search for lenders using various filters and criteria. For example, those who already have a lender in mind can search by its name to determine if it is approved by the FHA. Otherwise, homebuyers can find lenders using data, such as:

  • City, state or county.
  • Insurance type.
  • Service-originator type.
  • Rehab loans.

Even home improvement loans with bad credit require applicants to provide a thorough list of documents and information to get prequalified. The loan application process may vary slightly depending on the lender or loan type, but most applicants will need to gather the following documents or provide the following information:

  • Proof of employment
  • Proof of income
  • Information about finances

Some of the best home improvement loans allow homebuyers to complete much of prequalification process online or over the phone. Some may even allow them to apply for a loan and get approved without stepping foot in a bank or financial institution. It all depends on the lender, loan type and approval status of the applicant.

Homebuyers must get a current appraisal of the home’s worth and submit bids from contractors who plan to do the renovation. Lenders don’t have a say with who does the repairs, but they want to see a few bids to ensure the total cost of renovations is within the normal range for the type of work that must be done.

Eligibility Requirements for a Home Renovation Loan

Before learning how to renovate a house, it’s probably a good idea to determine if you can afford to do so. Buying a house in need of major repairs can be costly. Home renovation loans can help cut down the total out-of-pocket cost, but that usually means having a solid credit score and a low debt-to-income (DTI) ratio.

The eligibility requirements of home renovation loans are generally determined by the individual lender, except for the FHA rehab loan. All candidates must meet the federal eligibility guidelines to receive one:

  • Having a credit score of at least 620 (some lenders require scores of 640)
  • Having a maximum DTI of 41 to 45 percent
  • Paying a minimum down payment of 3.5 percent
  • Buying a home below the maximum loan limit for the area
  • Being the owner-occupant of the home
  • Paying annual mortgage insurance