How to Get a Home Improvement Loan

Whether you’re planning a long-awaited kitchen refresh or you unexpectedly need to replace your boiler, renovating or repairing your home can be expensive. Applying for a home improvement loan is one way to afford the home projects you want or need without draining your savings along the way.

Keep reading to learn more about home improvement loans, how they work, what loan options are available and ways you can borrow and budget responsibly.

What is a home improvement loan?

A home improvement loan is a loan that is used to finance home repairs or renovations by borrowing money from a lender, bank or credit union.¹ You pay back the loan in fixed, predictable monthly payments with interest — the cost of borrowing.

A home improvement loan could help you get the money you need to hire a contractor or pay for materials in the short term so that you can add long-term value to your home.

As you start financing a home renovation, you’ll need to do a few things to set yourself up for success. Let’s take a look at the process of getting a home improvement loan.

Estimate how much you need to borrow

The first step before you get a home improvement loan is to figure out how much you need to borrow. Depending on your project and what you are trying to accomplish, you might want to get quotes from multiple contractors to see how their estimates compare.

As you’re doing the calculations, don’t forget to factor in labor, materials and surprise costs. Adding a buffer to your budget in case of any last-minute expenses or unexpected costs could be helpful, but don’t overdo it — remember, you need to repay what you borrow.

Your monthly payment should fit comfortably into your budget. You don’t want to stretch your money to repay a home improvement loan only to struggle to afford your other bills down the road.

Also, it’s important to note that some lenders have minimum and maximum borrowing limits due to state laws, so make sure the lenders you’re considering can offer you the loan amount you need. OneMain, for instance, offers home improvement loans from $1,500 to $20,000.^†

Review your credit and finances

Before you apply for a loan, review your finances and get an idea of where your credit score stands. Checking your credit report can give you an idea of your current creditworthiness — the likelihood that you’ll repay a loan based on your financial history. Then, you have an opportunity to shift your financial habits if necessary. Changes won’t happen overnight, but actions like paying down debt, paying bills by the due date and using a smaller percentage of your available credit can all improve your credit score over time. A look at your credit report can also help ensure there aren’t any errors or fraudulent accounts that could affect your credit score.

Lenders often look at the following information to better understand your financial profile as a borrower:

• Credit score: Your credit score is a three-digit number that lenders use to assess your creditworthiness. Your credit score is based on a range of factors including your payment history, amounts owed, length of credit history, amount of credit, and your credit utilization ratio.
• Debt-to-income (DTI) ratio: Your DTI ratio measures how much of your monthly pre-tax income goes toward your monthly debt payments. Lenders use DTI to assess your ability to repay a loan.
• Income: Lenders may consider borrowers with regular sources of income more likely to be able to repay a loan.

Compare financing options

There are different types of financing available for home improvement projects. As you’re researching your options, you might consider the following:

Personal loan for home improvement

A personal loan is an installment loan, which means you borrow a lump sum of money from a lender, bank or credit union and repay it in predictable monthly payments with a fixed interest rate. With a personal loan, you’ll pay the same amount each month, as long as you pay on time, every time.

A personal loan can be secured or unsecured, and OneMain offers both. A secured loan requires collateral — something valuable, like a vehicle, that you offer to back a loan — while an unsecured loan does not have the same requirement. You might qualify for a lower interest rate or higher loan amount with a secured loan than an unsecured loan but remember that if you don’t repay a secured loan, the lender can take your collateral.

If you’re curious about whether a home improvement loan is right for you, consider prequalifying. Prequalification lets you consider your options and budget before you commit to a loan — without affecting your credit score. At OneMain, it only takes a few minutes to check for prequalified offers.

Home equity loan

A home equity loan, sometimes called a second mortgage, is money borrowed against the equity in your home (the market value of your home minus the amount you still owe on your mortgage). A home equity loan is a secured loan that uses your home as collateral. Because it’s secured by your home, a home equity loan typically has a lower interest rate and may offer a larger loan amount than an unsecured loan.² However, you typically have to pay appraisal fees to confirm the value of your house, which can add to your costs. And if you fail to repay the loan, the lender could take your home to recover their money.

Home equity line of credit (HELOC)

A HELOC also lets you borrow money against the equity you have in your home. But a HELOC works differently than a home equity loan because it’s revolving credit, similar to a credit card. You can borrow as needed, up to the limit, for a set amount of time called the draw period, during which you’ll make minimum monthly payments. When the draw period ends, you enter the repayment period, when you’ll repay what you’ve borrowed, either in one lump sum or installments, with interest. Like a home equity loan, you’ll typically need to pay an appraisal fee, and because it’s secured by your property, the lender has the right to take your home if you default. A HELOC also typically has a variable interest rate, which could make it harder to estimate how much you’ll owe each month.³

Apply for a home improvement loan

You can generally apply for a home improvement loan online, over the phone or in person, depending on the lender. You can typically find more information by going on a lender’s website, walking into a branch or calling and speaking to a representative.

Once the lender receives your application, they will perform a hard credit check, also known as a hard credit inquiry or hard credit pull. A hard credit check can cause a small, temporary dip to your credit score.

If you’re approved for a personal loan, the lender will typically distribute the money as a lump sum. Some lenders may send you the money the same day, while others may take longer. At OneMain, you may be able to receive your funds as soon as one hour after loan signing.^‡

Use the funds wisely and stick to your budget

While it could be tempting to spend your loan proceeds on other house-related costs or more costly features, it’s best to stick to your planned improvements. Not only will this help keep your project on budget, but also on schedule.

One of the best ways to make sure you’re staying within your project budget is to track your spending. You could make a list of all your project expenses, then add them to a spreadsheet, budgeting website, or phone app.

A home improvement project can get hectic quickly, but keeping track of where your money is going may help.

---

---

Smart borrowing for a better home

If used responsibly, a home improvement loan can help you make much-needed repairs or upgrades to your house. By comparing different financing options, borrowing the right amount of money and sticking to a budget, you could improve your home without taking on unnecessary stress or using your savings along the way.

Sources

1 https://www.nerdwallet.com/ca/p/article/loans/personal-loan-for-home-improvements
2 https://www.investopedia.com/home-equity-loan-vs-personal-loan-5271694
3 https://consumer.ftc.gov/node/78380