How to Get a Home Improvement Loan

Fact checked by Rebecca McClayFact checked by Rebecca McClay

To get a home improvement loan, you’ll need to take several steps, from filling out an application to accepting the funds. Here are the basic steps for getting a personal loan for home improvements, including determining how much money to borrow, comparing interest rates, choosing a loan, and completing the required paperwork.

Key Takeaways

• A home improvement loan is often a personal loan designed to finance a home improvement project.
• Home improvement loans often charge lower interest rates than credit cards but higher interest rates than other borrowing options like home equity loans.
• Lenders have various qualifying criteria, such as a minimum credit score or income level.
• When choosing a lender, consider factors like interest rates, fees, and customer service.

How to Get a Home Improvement Loan

Getting a home improvement loan usually involves these main steps:

1. Determine how much money to borrow: Calculate how much money you need to cover home improvement costs and how much you can afford to borrow. Understand your budget and how the monthly payment amounts will fit.
2. Check your credit: Before shopping for a home improvement loan, review your credit report and credit score to see how lenders will view you. You can check your credit report through AnnualCreditReport.com. Reviewing your credit can help you determine whether you need to improve your credit before applying, such as by paying off debt.
3. Weigh your options: Review home improvement loan options from banks, credit unions, and other financial institutions. Start with the bank where you already do business.
4. Compare rates: Compare the interest rates on different loans to try to find the one that is the most affordable. Loans with lower interest rates will save you money in interest in the long term.
5. Research fees and other factors: Review fees, repayment periods, and other key aspects of personal loan offers. Lenders can charge fees such as origination fees, and fees will vary by lender.
6. Pre-qualify: Pre-qualification can give you a good sense of how much money you can borrow without affecting your credit score. With pre-qualification, the lender will make a “soft pull” on your credit history. When you officially apply for the loan, they will make a hard inquiry that can temporarily lower your credit score.
7. Gather documents: Documents you might need for your application include a copy of your Social Security card or driver’s license; recent pay stubs, W2 or tax returns; and utility bills for address verification.
8. Submit the application: Financial institutions normally let you apply for a personal loan through their website or mobile app.

When Is It a Good Idea to Get a Home Improvement Loan?

Whether it’s a good idea for you to get a home improvement loan will depend on several factors about the loan and your own financial situation. Here are some pros and cons of home improvement loans to consider.

Pros

• Lower interest rates (compared to credit cards)

• Higher dollar amounts

• Fast funding

• Stronger credit

Cons

• Higher interest rates (compared to home equity loans)

• Adds to debt

• May include fees

Pros Explained

• Lower interest rates: A home improvement loan can generally provide lower interest rates than other lending options, such as credit cards.
• Higher dollar amounts: You may be able to borrow more money than you can with a credit card or another lending option. The amount of money you can borrow will depend on the maximum amount allowed by the lender and the size of the loan you qualify for.
• Fast funding: The money you borrow may be available as soon as the same day your application is approved.
• Stronger credit: As long as you make timely loan payments, your credit score can improve as you pay down your debt. Your payment history comprises 35% of your credit score, and your credit mix comprises 15%. Keep in mind that it will take time to see your credit score improve as it can also be weighed by additional debt. 

Cons Explained

• Higher interest rates: The interest rate for a home improvement loan may be higher than the rates for other loans, such as a home equity line of credit (HELOC) or home equity loan.
• Adds to debt: When you take out a home improvement loan, you’re adding to your debt. Too much debt can lower your credit score and cost you interest. It can also affect your cash flow, reducing the amount of money you can spend toward other goals.
• May include fees: A lender may charge fees for a personal loan, such as late payment fees and origination fees. Each lender sets its own fee policies. 

Average Home Improvement Costs

The table below shows nationwide cost estimates of common home improvements for 2022 from the National Association of the Remodeling Industry, as reported by the National Association of Realtors.

What You Need to Qualify for a Home Improvement Loan

Items you’ll likely need to qualify for a home improvement loan include:

• Stable income
• Solid employment history
• Minimum credit score
• Debt-to-income ratio generally no higher than 43%
• Proof of home ownership
• Cost estimate for home improvement project
• Tax returns
• Bank statements
• Proof of income

Choosing a Home Improvement Loan

When you’re choosing from the best home improvement loans, you’ll need to consider several factors that can vary from lender to lender. Among them are:

• Interest rates: Interest rates affect the total cost of the loan. Loans with lower interest rates will save you more money in the long run.
• Borrower requirements: Lenders set their own requirements, such as minimum credit score or qualifying debt-to-income ratio.
• Pre-qualification: Some lenders let you pre-qualify for a home improvement loan. This can help you determine whether you are likely to qualify without affecting your credit score. You will still have to apply officially, at which point the lender will make a hard credit inquiry, which can temporarily lower your credit score.
• Terms: Lenders offer varying terms, from several months to many years. Determine the amount of time you’d like to have the loan and ensure your lender offers that term. The longer your loan term, the lower your monthly payments. However, you’ll pay more in total interest with a longer term.
• Fees: Lenders can charge various fees associated with the loan, such as origination fees. Compare fees among the lenders you are considering.
• Customer service: What do online reviewers say about the customer service at the lenders you’re considering? Are the comments mostly positive or negative? Check review sites like the Better Business Bureau.

Note

The process of applying for a home improvement loan is relatively straightforward. The time from application to approval might be only one day.

Alternatives to a Home Improvement Loan

Alternatives to a home improvement loan include:

• Home equity loan: A home equity loan enables you to borrow money by tapping into your home equity. One downside is that equity acts as collateral. So, if you default on the loan, you might face foreclosure.
• Home equity line of credit: A home equity line of credit (HELOC) lets you take out a line of credit, similar to a credit card. Your home serves as the collateral for a HELOC. This means that if you fail to repay the loan, you could lose your home.
• Cash-out refinance loan: A cash-out refinance loan is a type of mortgage that allows you to trade the equity in your home for cash. This type of loan replaces your current mortgage.
• Credit card: If you’ve got a high enough credit limit, you might look into using a credit card to pay for home improvements. However, this strategy will likely cost you more. In November 2023, the median interest rate for credit cards was 22.75%, compared with an average interest rate of 12.35% for a two-year personal loan. (If you use a 0% introductory rate credit card, you could potentially get the funds for free if you can repay before the introductory period ends.)
• Savings: You might consider dipping into your savings to pay for a home improvement project. While you won’t pay interest on a loan, you would lose out on interest you would have earned on the money you withdraw.

What Is a Typical Term for a Home Improvement Loan?

The typical term for an unsecured personal loan for home improvements is two to seven years. Loan terms vary by lender. 

What Is the Minimum Credit Score Needed for a Home Improvement Loan?

You may need a minimum FICO Score of 580 to get a personal loan for home improvements. By comparison, you’ll probably need a FICO Score of at least 680 to qualify for a home equity loan or home equity line of credit.

Are Home Improvement Loans Tax Deductible?

Interest on a personal loan for home improvements is generally not tax deductible. For tax years 2018 through 2025, interest on home equity loans or home equity lines of credit that are secured by your primary or second home and are used to buy, build, or “substantially improve” the residence may be tax deductible.

What Is the Difference Between a Home Equity Loan and a Home Improvement Loan?

A home equity loan lets you borrow money based on the equity you’ve accumulated in your home. The equity serves as the collateral for a home equity loan. By contrast, a home improvement loan is typically a personal loan used for home improvements. This type of loan normally doesn’t require collateral.

Is a Home Improvement Loan a Good Idea?

A home improvement loan might be a good idea if your finances are in order and you want to spruce up your residence. However, data released in 2023 by Zonda Media shows you can make a return on investment, although it will likely be below 100% of what you pay.

The Bottom Line

Getting a home improvement loan is straightforward, but you must meet the lender’s criteria. Before you choose a home improvement loan, compare interest rates, terms, fees, and other factors. Finally, always ensure you can afford to repay any debt you take out.

Read the original article on Investopedia.