When you have been living in your home for many years, it is natural for it to have experienced wear and tear, especially in the high traffic areas like the living room, bathroom, and kitchen.
Photo by Martha O’Hara Interiors
Home renovation, although normally a budget breaker, can refresh your home and make it more enjoyable to stay in.
You can also use the opportunity to make it more suitable for your growing family and bring the facilities and conveniences up to date. Since home renovations can cost thousands of dollars, almost everyone relies on some kind of a loan repayable over time to fund the renovation project. If you have good credit, getting a loan on easy terms is not a problem; however, people with poor credit can find it difficult to access the funds on reasonable terms. Some of the top ways in which, you can finance your home renovation if you have got poor credit:
Home Equity Loans
Home equity loans are perhaps among the best funding methods for people who own substantial equity in their homes but do not have a very good credit score. It is possible for you to take a second mortgage at a very competitive rate because the financier has the assurance of collateral in the form of your home and the lending risk is less. While lenders prefer borrowers to have credit scores above 700, it helps if you have got significant equity in your home to compensate for your poor credit.
It is not necessary for you to get the home equity loan from the original financier, rather if you shop around, you will invariably be able to discover better deal that can drive your interest expense down, but you need to be careful of processing fees by a variety of names that can be charged by lenders. A variant of a home equity loan is a home equity line of credit that instead of disbursing the entire amount upfront makes available a line of credit against which you can pull out money as and when you like for the home renovation project. Since your home serves as collateral, it is important not to default on the repayments.
Personal Loans
Personal loans are unarguably the most hassle-free method of financing home improvements, especially when the amount required is not very large. Personal loans are extremely versatile, as the lender does not specify what the money can or cannot be used for so it does not matter if you make changes to the home rehab plan. The application process of a personal loan is generally simple and the loan approval takes a matter of just a few days with some of the leading private online lenders like Liberty Lending promising to approve the loan in a matter of minutes if the documentation is okay.
With the emergence of multiple online loan facilitators, it is possible to shop around for the best terms and rates of interest without any impact on your credit score. Since personal loans are typically unsecured, the most important factor is your credit score. If you have poor credit, you will need to be ready to pay higher rates of interest and beyond a point, only certain lenders that specialize in lending to customers with poor credit will entertain you.
It can be tempting to extend the loan period to keep the monthly repayment affordable, it needs to be appreciated that when the APR is high, by extending the period of the loan only serves to make the loan more costly due to the extra interest payable. Apart from the rate of interest quoted by the lender, you will also need to pay processing or origination fees that can sometimes be as high as 5-8% making the loan far most costly. To be able to compare various offers, ask the lenders to quote the APRs instead of the raw interest rate as the APR takes into account all the costs involved and converts in to into an annualized percentage rate.
Rehabilitation Loans Backed By the Government
Depending on the nature of the home improvement, you may be eligible for a government-backed rehabilitation loan. These loans are available relatively cheaply as the government backing acts as an assurance to lenders who are prepared to be flexible with the credit requirements. According to Zillow, borrowers with a credit score of 580 or higher can qualify by making a down payment of as little as 3.5% while borrowers with credit scores of 500-579 need to make only a 10% down payment to qualify for an FHA loan. The amount and availability of these loans depend on the end-use, location, employment history, and your credit.
The FHA 203(k) Rehab Loan is available for purchase as well as refinance of your home to facilitate repair and rehab of your home. The US Department of Agriculture insures two types of loans for home repair and rehab for applicants residing in eligible areas who have no other options. Both Section 504 Home Repair program and Section 502 Direct Loan Program are aimed at low-income applicants for repairing, improving, or modernizing their homes.
The Department of Veteran Affairs also provides home improvement financing to disabled veterans for the construction, purchase or remodeling of homes. The main thing when considering applying for a government-backed rehab loan is to check whether you and the property will be eligible for the loan as the loan conditions are very specific and restrict the end-use of the money to certain types of repairs and renovation.
Conclusion
When you have poor credit, the best method of financing your home improvement is to get a home equity loan or line of credit. However, this works only if you have substantial equity in your home and have a stable income that eliminates the chance of your defaulting on the loan and putting your home at risk of repossession. If you are eligible, try to get government-backed financing, as these are generally cheaper. It is important not to rely on credit cards to finance home improvements, as the APRs of sub-prime credit cardholders tend to be steep and rolling over the balance can lead to a debt trap.
