Home Improvement Loan Tips

If your home could use a little face-lift, but you are unable to pay for improvements, you may be considering taking out a home improvement loan from your bank or mortgage company. Here are a few tips to help you choose and manage the best loan for your needs.

Mind Your Credit

In today's economic climate, banks are more reluctant than ever to provide credit to what they consider "high-risk" borrowers. Though interest rates on all types of loans are at an all-time low, and it could be a great time to borrow from your home equity, if you don't have a great credit score, you will have a tough time convincing lenders to give you a loan. The best thing you can do before looking for a loan is to monitor your own credit score, and do what you can, to increase your score before applying. Many online companies offer credit-monitoring services for a low fee, and if you have been turned down for a loan because of your credit, you may be able to receive a free copy of your credit report from one of the three credit reporting companies -- Equifax, Experian and TransUnion -- which most banks use to make their loan decisions.
To get the best rates, your score will need to be in the 800-900 range, though a good credit score is generally over 700, but even if your score is as low as the mid-600s, you may be able to get a higher-rate loan from banks that specialize in high-risk loans. If your credit score is 500 or below, you will need to take action to improve your credit before applying for any loan.

203k

If you want to purchase a home that is in need of repair, and you plan to live in the home right away, you will need to get a special loan called a 203k. This loan will pay off the seller and put estimated repair funds into an escrow account, where it will be doled out to the contractors a little at a time until the work is complete. The FHA-backed loan amount is based on the purchase price of the house, plus the estimated costs of repairs or renovations. Because it is federally insured and backed, lenders do not require that the property be repaired and inspected before the closing date of the loan, which is overseen by the federal Housing and Urban Development agency (HUD).
Contact your local bank or mortgage broker to request information on the HUD 203k home repair loan, or visit the HUD website listed at the bottom of this article.

Mortgage Brokers

If your home is worth more than the amount you owe for it, you have what is known as "equity" and may be eligible for a "home equity loan." Be sure to contact a reputable mortgage broker and shop around to get the best available rates. Rather than allowing several banks to run a credit check on you to give you a rate, a mortgage broker can verify your information and represent your loan needs to several banks at once, allowing you to choose the one that's most suitable for your needs. The broker will be paid by the bank, so she will have their best interest, as well as yours, in mind when arranging for the loan. Be sure to use someone you trust, preferably someone who comes highly recommended for her honesty and availability to answer your questions and who has a track record of closing on time.

Avoid Home Repair Scams

Unfortunately, there are dishonest contractors who are seeking to take advantage of unsuspecting homeowners. Be wary of signing any type of home-loan contract with a contractor who shows up on your doorstep and claims to be able to get you a low-rate loan for repairs that he suggests. Very often, these loans are misrepresented, and the contractor is actually being paid kickback fees by the bank. Not only will you owe more than you bargained for, but the work may never be finished, as the contractor moves on to the next house after being paid his fee by the bank.
To avoid these types of scams, always seek out your loan first, then hire a contractor. Ask for advice from friends and neighbors about who to use for home improvement loans, or call a mortgage broker you've used before or know about firsthand. A reputable Realtor may also be able to help you find a good mortgage broker. Remember: If a home improvement deal seems too good to be true, it probably is.