Kerkez/ Getty Images; Illustration by Austin Courregé/Bankrate
Key takeaways
- Home improvement loans are personal loans by another name, lent by banks, credit unions and online lenders.
- Renovation loan requirements typically focus on your credit, debt-to-income ratio and other key financial factors.
- Before you borrow a home improvement loan, consider the alternatives for urgent repairs, and attempt to avoid borrowing for projects that can wait.
- If you proceed, prequalify with multiple lenders to find the lowest possible interest rate for your situation.
Applying for home improvement loans might seem like a time-intensive process, akin to getting a mortgage. But this financing option — typically advertised as a personal loan — is simpler than you might imagine and is widely available. Compare options from banks, credit unions and online lenders.
Unlike mortgages and home equity loans, personal loans for home improvement are typically unsecured and are based on your credit and other eligibility criteria. If you have strong credit and steady income, you might sail right past renovation loan requirements. Without strong financials, you could still get a home improvement loan, but at a steeper cost.
1. Determine how much you need to borrow
Some home renovations and repairs are straightforward. If you need to replace a failing HVAC unit, for example, you might simply tally the costs of a new system and the installer’s estimate. Other home improvement projects — such as a major remodel or home addition — might have too many variables to set an exact cost estimate.
Whatever your situation, the more homework you can do before borrowing, the more accurate your loan amount will be. It’s wise to borrow the smallest amount needed to fund your project (and only what you can afford to repay). Limiting your requested loan amount could also improve your chances of approval and potential interest rate.
Tips to estimate (and lower) the cost of your project
- Consider a “DIY” approach to some or all of it.
- Get multiple estimates for materials and from contractors.
- Budget for potential complications (and clean-up).
2. Review renovation loan requirements
Home improvement lenders set unique eligibility criteria that vary by your requested loan amount and repayment term, among other factors. That said, lenders typically seek:
- Good credit score of 670 and above. Some lenders offer loans to borrowers with lower credit scores, but those loans typically come with higher-than-average interest rates and fees.
- Low debt-to-income (DTI) ratio of less than 36 percent, though a higher figure won’t necessarily bar you from approval. Your DTI ratio measures how much pre-tax income you have left after paying your current monthly debt.
- Steady source of income via recent pay stubs, bank statements, W-2s or tax returns. Some lenders may also have a minimum income requirement.
- Citizenship or permanent residency is another common renovation loan requirement, though applying with a stateside cosigner or co-borrower could help you qualify. Be prepared to hand over a copy of a valid ID (like a driver’s license or passport), plus proof of residence (perhaps utility bills or bank statements received at your address) among other common document requirements.
3. Consider personal loan alternatives
Before you proceed with a personal loan to fix up your property, confirm it’s the best financing option for your situation. There are many ways to pay for home improvements, including:
| Pros | Cons | Next steps | |
| Budget and save | – Avoid debt repayment – Lessen risk to your finances |
– Not realistic for urgent home repairs – May force you to raid your savings |
Learn how to budget for a home renovation. |
| Borrow from family | – Skip interest and fees associated with traditional lending – Don’t worry about eligibility criteria |
– Putting a personal relationship at risk if repayment goes awry – Won’t improve your credit |
If you have a family member on strong financial footing who is willing to lend you money, create a contingency plan for repayment. |
| Home equity loan or HELOC | – Borrow against your home equity with a competitive interest rate – HELOCs work like credit cards, offering on-demand funds, delayed repayment |
– Strict eligibility criteria, including loan-to-value ratio – Secured financing puts your home at risk if you fall behind in repayment |
Learn about the risks and rewards of using home equity to finance home improvements. |
| Cash-out refinance | – Allows you to tap equity without adding a second mortgage – You may qualify for a larger loan |
– Upping your mortgage rate (via refinancing) can significantly increase your interest costs – Foreclosure risk if you struggle with repayment |
Track current cash-out refinance rates to determine whether you could keep or lower your current home loan’s APR. |
| Credit card refinance | – Good for projects with variable costs – Doesn’t require a loan – Potential to earn credit card rewards |
– High interest charges, unless you zero your balance each month – Tempting to overspend |
Re-check your budget to confirm whether you have the cash flow to pay off your credit card debt on time, then consider the best credit card to use. |
| Government assistance | – Potentially lower interest rates, better terms – More flexible eligibility criteria |
– Need- and location-based – Not all projects approved |
– Title I Property Improvement Loans – 203(k) Rehabilitation Mortgage Insurance Program – Other programs for specific groups – Programs available from your state |
If it’s critical, like a leaky roof that’s causing more damage… then those are the types of situations you want to take care of sooner rather than later. But if it’s a situation where it’s a remodel for cosmetic reasons, we’d ask the consumer to think hard about taking a loan for those purposes and instead saving up for those things that can wait.
— Barry Coleman
a vice president at the National Foundation for Credit Counseling
4. Get prequalified with multiple lenders
Once you decide that a personal loan for home improvement is your best option, take advantage of lenders that offer prequalification. This process uses a soft credit check to confirm your eligibility and check potential loan rates and terms. Shopping around — ideally with a mix of banks, credit unions and online-only lenders — can help you land the best personal loan rate for your situation.
While it’s always wise to prequalify, it’s doubly important if you don’t have the best credit. Bad credit loan rates can trump even credit card APRs, rising to 35.99 percent among some online lenders. Before zeroing in on any one financial institution, don’t forget to comparison shop with federal credit unions that are mandated to cap personal loan rates at 18 percent.
5. Compare loan options with your budget
Ideally, after prequalifying — perhaps via a loan marketplace that presents multiple offers side by side — you’ll have some options to compare. Understanding how a personal loan works and how to calculate your short- and long-term costs of repayment is critical to picking the best option.
For example, let’s say you’ve received three offers for a $20,000 home improvement loan. Using a personal loan calculator can help you understand which might be the optimal fit for your budget.
| Loan 1 | Loan 2 | Loan 3 | |
| APR | 18% | 19% | 20% |
| Term (years) | 3 | 4 | 5 |
| Monthly payment | $723 | $598 | $530 |
| Total interest | $6,030 | $8,704 | $11,793 |
| Total repayment | $26,030 | $28,704 | $31,793 |
| Best option if… | You have room in your budget for the highest monthly payment (to minimize your interest costs). | You require a lower monthly payment (in exchange for almost $3,000 more in interest charges). | You can only afford the lowest possible monthly payment (at the cost of forking over nearly $6,000 in additional interest). |
If, after crunching the numbers, you realize that the potential monthly dues could break your budget altogether, it’s better to avoid (or delay) borrowing, if you can help it. Instead, focus on improving your credit (to get a lower APR) or finding an alternative financing option. You might also investigate adding a cosigner or co-borrower to your application.
6. Submit an application with your preferred lender
Once you’ve identified the best loan and lender for your scenario, you can proceed with the formal application process (that, unlike prequalification, requires a hard credit check). Most reputable lenders operating nationally have an online application, but some smaller banks or credit unions may require that you complete the process in person or become a member first.
If your application is approved, your lender will send you the final documents and loan agreement. Read through the agreement carefully before signing it. Make sure you’re familiar with every fee charged and that there are no clerical errors.
Once you sign the loan documents, the lender will deposit the funds into your chosen bank account. Then you can begin using the funds while simultaneously entering repayment.
If you realize that you overborrowed, return your unused loan funds to the lender in the form of an extra payment toward your new debt. That’ll trim your outstanding balance. Also, consider enrolling in automatic payments to help avoid missing a future due date.
Bottom line
Now that you know how to get a home improvement loan, take your time proceeding through the steps above. And keep in mind that not all consumers have a direct, A-to-B path to borrowing. If you don’t quite meet renovation loan requirements, for example, consider alternative options for urgent home repairs. And for home improvement projects that can wait, consider budgeting, saving up and a “DIY” approach to avoid (or lessen your) borrowing altogether.
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