Home Improvement

While not plentiful, there are a few lenders who will make bad credit home improvement loans for borrowers with sufficient equity in their property. But there are issues of which you should be aware. The most important is the home improvement loan interest rate. The limited number of home improvement lenders that make bad credit home improvement loans tend to price these quite high. Instead of enjoying the usual low interest home improvement loans, borrowers with poor credit are normally required to pay much higher interest.

Another consideration facing credit score challenged borrowers is the allowable loan-to-value (LTV). More “exotic” options, like unsecured home improvement loan credit products or no equity home improvement loans, are unavailable to these borrowers. In fact, even 80% to 85% LTV levels are often off limits. Poor credit borrowers may be restricted to 70% to 75% LTV (sometimes even less). Having a decent LTV position can be an important component in a bad credit home improvement loan environment.

The best course of action is to locate a lender willing to give a home improvement mortgage loan to a poor credit borrower and refinance it into a first mortgage or replace it with a low interest home equity loan as soon as your credit score improves enough to qualify for a standard loan. You will have improved your home and restructured your financing into a much better situation.

The amount you might receive from a loan for home improvement will depend on a few factors.

• The value of your equity in your home;
• The amount of equity loan for which you can qualify based on your gross monthly income and other outstanding debt; and
• The nature and size of the home improvements you plan to make.

If your project requires more money to complete, you can ask your lender if your home could be appraised “as complete”, which will give you credit for your improvements as if they were finished. This will, hopefully, increase your home’s FMV, giving you more equity, and, therefore, more potential cash out.

Should you have enough money available for your home improvements, the only remaining question is the amount you can afford to borrow. Your gross monthly income and the level of your other debt will determine the amount of the loan for which you qualify. Hopefully, you will qualify for the amount of money you need to complete your project.

Legally, equity home improvement loans would look almost identical to standard home equity loans. However, they work a bit differently and – you might qualify for more money with a home improvement loan. Depending on the nature of your remodeling, you can request home improvement lenders to appraise your home “as complete”, which asks that its value be estimated as it will exist after you finish your home improvements. If you’re improving wisely, your home will have a higher Fair Market Value (FMV) after the work is completed, thereby giving you more equity in the property. The higher your equity value, the larger the loan for which you will qualify.

Low interest home improvement loans often require a bit more “work” on your part. Home improvement financing normally requires a statement of the work to be done on your home. A full written estimate from a contractor will usually suffice. If you’re a do-it-yourself person, you’ll need to write up a description of your improvements, the associated cost of materials, labor, and basic “specifications” of the work to be performed. If you need the additional FMV that an “as complete” appraisal might provide, you’ll be better served by being as detailed in your explanation as possible, leaving as little as possible to the imagination of the appraiser. If you’re putting Italian marble in your foyer, you don’t want the appraiser to give you credit for only inexpensive plastic tile.

You can use an online home improvement loan calculator to estimate your monthly payment to project your new budget. A mortgage home improvement loan, while based on the equity in your home, will also often be structured with a schedule of funds disbursements corresponding with the “phases” of your remodeling project.

A home improvement loan program is designed to provide you with the exact funds you need to complete a remodeling project in your home. Home improvement lenders need to know what you are planning to do, how you are planning to do it, and how much you estimate the project will cost. Your presentation of the project can be very important in getting the home improvement mortgage loan you want, so make it look as “professional” as you can.

Some home remodeling loans are disbursed in three segments with a minor “hold back”. The schedule will often look like this:

• 1^st disbursement – 30% of the loan;
  
• 2^nd disbursement – 30% of the loan;
  
• 3^rd disbursement – 30% of the loan.
  

Some home improvement lenders will hold back 10%, to be disbursed when the project is completely finished and “signed off” by both borrower and lender. Keep in mind that schedules vary greatly depending on the project.

If your project involves a different disbursement requirement, say 40%, 20%, and 40%, your lender might agree to this schedule. Should your loan be for home repair financing, you might need a 50% - 50% disbursement, or possibly just one, with 100% given to you at the beginning or the end of your project. Your lender will need confidence that the work for which you’re being given proceeds has been completed. Using either physical inspections or some other third party written verification that your project phases are finished, disbursements will be made to you or your contractor.

Interest expenses on a home equity loan may or may not be tax deductible. But, home improvement loans, assuming the loan-to-value (LTV) is 100% or less, most often result in a home improvement tax credit. This results from the classification of home improvements as a valid reason to use a home equity loan to allow you to deduct your interest cost.

While it’s true that a straight home equity loan is probably easier to get, (easier defined as faster with less documentation), the interest is not automatically tax deductible, even though it is a loan with real estate as collateral. Since a home equity loan on your primary residence is not used as a component in the purchase transaction, the Internal Revenue Service has ruled that the purpose of the cash out from this loan is deductible only when it fits certain circumstances.

Home improvements have been determined to be an excellent reason, giving you one potential advantage of using a home remodeling loan to achieve your goal in lieu of a normal home equity loan. Since using an equity home improvement loan for your project will provide you with good documentation to support your tax deduction decision, this loan can be the best choice if you want to be comfortable with your tax issues.

A home equity loan or home equity line of credit (HELOC) is perfect for financing home improvements. If you have prepared a basic budget or have a written, firm quote from a contractor regarding your improvements, you know how much money you should need to complete your project. It might be a good idea to borrow about 10% more than you think you’ll need to allow for price increases or changes you decide to make. You can always make an extra principal payment to “give” the extra funds back and not pay any more interest on them.

Should your home improvement project be significant or is projected to be completed over a longer term, a HELOC is probably the best choice. Since you won’t pay interest on funds you haven’t used, you might save considerable dollars in interest costs if you aren’t required to withdraw and use some funds until a future date, when parts of your project will be completed.

Another advantage of using a home equity loan for improvements are home equity tax considerations. Per Internal Revenue Service rules, home equity interest is not automatically tax deductible even though it is a real estate loan. The purpose of the home equity loan often dictates the tax deductibility, with home improvements being the most accepted reason that indicates that the interest is tax deductible. Always consult with your tax advisor to ensure you handle home equity loans properly.