How to Get a Home Improvement Loan with Bad Credit

Do you need to renovate your home? Whether it’s a flooded basement, a broken water heater, or an outdated, dysfunctional bathroom, your home is bound to need repairs. There are also times where you just want to give your kitchen a makeover or turn your bathroom into an oasis.

If you have cash on hand or good credit, it’s relatively simple to figure out a way to pay for renovations.

However, not all home improvements wait until you’re financially ready for them. Serious maintenance issues – like a leaky roof – need to be fixed as soon as possible to prevent further damage. Waiting to do necessary renovations can hurt your home value.

A bad credit score will typically disqualify you from traditional home improvement loans – like home equity loans or HELOCs (home equity lines of credit). The good news is that traditional home improvement loans aren’t your only option. 

Are you wondering how to get a home improvement loan with bad credit? Here are four options to help you finance your renovation when you have bad credit.

Personal Loans

Personal loans are non-specific loans that can be used to finance nearly anything – like home improvement projects. With a variety of financing amounts, there’s likely a personal loan that will cover your renovation cost. 

Personal loans can either be unsecured or secured. Unsecured personal loans don’t have collateral – like your home, car, or savings account – to secure the loan. While this means you won’t risk your home or car if you default on the loan, unsecured personal loans have higher interest rates. Without a good credit score, you could have a rate as high as 36 percent.

Secured personal loans require you to provide collateral to get the loan. Because the lender can take your home or car as payment if you default on the loan, secured personal loans have lower interest rates. You won’t have to pay as much over the lifetime of the loan, but you risk losing your home (or any other collateral you put up) if you can’t repay the loan. 

Unlike traditional home improvement loans (like home equity loans), personal loans don’t have as strict eligibility requirements. Whereas home equity loans require a minimum credit score of 620-680, depending on the lender, personal loans lend to people with scores as low as 580. This means you could qualify for a personal loan when you can’t qualify for other loans. 

Personal loans also have shorter loan terms than traditional renovation loans. This means you only have 2-5 years to repay the cost of your renovation – instead of 15-30. With a shorter loan term, you’ll pay off your debt faster. However, your monthly payments will be higher – which could be a challenge on top of other financial commitments. 

Personal loans offer a variable financing amount for people with lower credit scores. However, high interest rates and short loan terms can make it challenging to repay personal loans. 

Pros:

  • Low minimum and large maximum borrowing amount
  • Lower credit score requirement
  • Option for a loan without collateral 

Cons:

  • High interest rates
  • High monthly payments
  • Short loan term

Home Equity Loans/HELOCs From Specialized Lenders

A bad credit score will prevent you from qualifying for a home equity loan or home equity line of credit (HELOC) from most lenders. However, certain lenders have home equity loans or HELOCs for people with bad credit. 

A home equity loan allows you to borrow against the equity you’ve built in your home. Your equity is the amount you’ve paid off on your mortgage. If you’ve paid off $250,000 of your original $500,000 mortgage, you have roughly $250,000 of equity in your home. You can borrow against this equity to pay for your home renovation. 

With a home equity loan, your home is collateral to secure your loan – making it a second mortgage. This means you risk losing your home if you default on your loan. Additionally, you can only borrow 80-90% of your home’s full value with these loans. This means taking your current mortgage amount, plus the amount you want to borrow, and you still need to be under 90% of what your house is currently worth.

Like home equity loans, HELOCs allow you to borrow against the equity in your home. However, instead of a lump sum, you get a revolving line of credit. You can borrow from your credit line as many times as you want – until you hit your borrowing limit. This means you only borrow as much as you need. 

HELOCs have two periods – the draw and repayment period. During the draw period (the first 10-15 years), you can borrow money and only repay the interest. For the repayment period, you have monthly payments to repay the money you used, plus interest. 

Since both home equity loans and HELOCs allow you to access your equity, they’re frequently used as home improvement loans. However, they have strict credit requirements – like a minimum credit score of 620-680. Without good credit, you won’t be able to get these loans from most lenders.

However, some lenders have specialized loan programs for people with bad credit – as low as 600. To offset the risk when lending to people with bad credit, these loans generally have very high interest rates. Plus, you can only borrow $20,000-$30,000 – which might not be enough for large renovation projects. 

While home equity loans and HELOCs from specialized lenders allow you to access your equity, they come with high interest and small maximum amounts.

Pros:

  • Can access your equity 
  • Easier eligibility requirements
  • Longer repayment period

Cons:

  • High interest rates
  • Small maximum loan amounts
  • Won’t lend to anyone with a credit score under 600

Government Loans

Government loans are another option to finance your renovation project. Typically, government loans have the least strict eligibility requirements. 

With most government loans, you borrow from a private lender, but the government insures your loan. This reduces the risk lenders face when lending to you if you have bad credit. Because of this, government loans tend to have lower interest rates than other loans for borrowers with bad credit. 

FHA 203k Refinance Loan

There are a variety of government loan programs. One of the most common is an FHA (Federal Housing Administration) 203k loan. FHA 203k loans are mortgages that allow you to borrow more than the purchasing price to do renovations.

While FHA 203k loans are generally for people buying a home, you can refinance your mortgage to an FHA 203k loan. This means that you’ll replace your current mortgage with a new one. Thanks to the low eligibility requirements, you should have a chance to qualify for this loan even with bad credit. 

If you have equity built in your home, you can finance an FHA 203k loan for more than you owe on your home. This is called a cash-out refinance because you get a payment for the difference between what you owe on your first mortgage and the new loan. 

If you owe $100,000 on your $200,000 home and you take out a new mortgage for $170,000, you get a payment for $70,000. You can then use this money to finance your renovation. However, you’ll owe much more on your home afterward. Plus, you’ll have to purchase mortgage insurance, which is an added monthly expense.

FHA Title I Loan

Another government loan option is FHA Title I loan. With this loan, you can borrow up to $25,000 for your renovation project. However, you can only make necessary (not optional) improvements to your home. Fixing your roof is an example of a necessary improvement. Installing a pool is an optional improvement. 

USDA Repair Loan

A specialized government loan option is the USDA repair loan. USDA loans are only available for people living in disadvantaged rural areas. With this loan, you can borrow up to $20,000 to repair your home, which might not be enough for larger projects. If you live in the suburbs or city, this loan won’t be an option for you. 

Property Assessed Clean Energy Program (PACE) Loan

PACE loans are another specialized loan. They can only be used to make energy-efficient improvements – like energy-efficient appliances or solar panels. If you have a more general home repair – like fixing a flooded basement – you won’t be able to use this loan to finance it. 

PACE loans place a first priority lien on your home – meaning lenders can foreclose on your home if you default on your loan. Because PACE loans take priority over traditional mortgages, many mortgages won’t let you get a PACE loan as well. So, you need to check your mortgage terms before getting a PACE loan. 

Instead of being attached to you, PACE loans are attached to your home.This means that when you sell your home, the PACE loan will become the next owner’s responsibility. Because it’s an added expense, PACE loans can make it harder to sell your home. Many homebuyers don’t want another loan on top of their mortgage. 

You have up to 25 years to repay your PACE loan. Unlike other loans, you repay PACE loans through property taxes. This means you won’t have another monthly payment to worry about. However, you could have very high tax bills – which can be hard to manage on top of other financial challenges. 

A variety of government loans are an option to finance your renovation if you have bad credit. Depending on where you live and what improvements you want to make, you might not qualify for all of them. 

Pros:

  • Easier eligibility requirements
  • Option for no monthly payments
  • Lower interest rates

Cons:

  • Small loan amount
  • Can have project requirements
  • Can have location requirements

Home Equity Investment from Point – Equity Financing for Homeowners

While home improvement loans are traditional methods for financing your renovation without cash, a Home Equity Investment from Point offers an alternative. With a Home Equity Investment from Point, you can get up to $350,000 for financing your renovation.

Unlike a loan, you won’t have a monthly payment. Instead, you can repay Point’s investment any time in the 30-year term or when you sell your home. This allows you to pay for necessary renovations now without worrying about another monthly expense. 

Point also considers a much wider range of homeowners than traditional lenders. Like, those with lower credit scores or homeowners with higher debt to income ratios. If you’re unable to qualify for other financing options due to your financial situation, you still have a good chance to qualify with Point. 

Plus, with Point, you don’t have to pay traditional interest on the money you receive. Instead, at the end of the agreement, you pay back the lump sum plus a portion of your home’s future appreciation. This appreciation amount is determined at the beginning of the process. 

If you need to renovate your home but don’t qualify for (or want) a loan, Point provides a great option for financing your renovation.

Wrapping It Up

Renovating your home can be both exciting and nerve-wracking. It’s exciting to fix problems that have made it hard to enjoy your home. Plus, you can renovate to get exactly what you’ve always wanted – like a metal roof or an updated kitchen. 

However, it can also be challenging to figure out how to pay for a renovation – especially if you have bad credit. Some renovations can wait if you don’t have the funds. Others (like fixing a broken water heater) can’t wait. If you do delay repairs, it could cause damage to other areas of your home. Plus, it could bring down your home’s value. 

If you need a home improvement loan but have bad credit, you still have options. You could get a personal loan, a loan from specialized lenders, or a government loan. 

All of these options allow you to get the money you need for your renovation project. However, they have many drawbacks – like high interest rates, low loan amounts, and large monthly payments. 

A Home Equity Investment from Point offers an alternative to traditional financing methods, and it isn’t a loan. Plus, you don’t have to worry about monthly payments, high interest rates, or having bad credit. 

When you partner with Point, you simply get the cash you need. You can repay Point’s investment (plus a percent of your home’s future appreciation) any time in the 30-year term (or when you sell your home).If you want an alternative to traditional loans, see how much you can get with a quick quote from Point.

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