How to Get a Home Improvement Loan
A home improvement loan is a type of personal loan you can use to fund home improvement projects. Amounts can range from $1,000 for a small and simple project up to $100,000 for large and involved home improvements. The amount of time you have to pay back the loan will vary, as well. Some are as little as 24 months, while larger loans could have terms of up to 20 years.
Home improvement loans are available from just about every bank and credit union. You can even find them from nonbank lenders who are able to work with borrowers who may not qualify for a regular bank loan. (You can find many from both categories here on Acorn Finance.)
Read on to learn about the home improvement loan process and what you need to know to make the best financial decision.
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$1,000-50,000
Loan Amount
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8.49-35.99%
APR
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3–7 years
Terms
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560
Minimum Credit Score
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Disclaimer
Personal loans made through Upgrade feature Annual Percentage Rates (APRs) of 8.49%-35.99%. All personal loans have a 1.85% to 9.99% origination fee, which is deducted from the loan proceeds. Lowest rates require Autopay and paying off a portion of existing debt directly. Loans feature repayment terms of 24 to 84 months. For example, if you receive a $10,000 loan with a 36-month term and a 17.59% APR (which includes a 13.94% yearly interest rate and a 5% one-time origination fee), you would receive $9,500 in your account and would have a required monthly payment of $341.48. Over the life of the loan, your payments would total $12,293.46. The APR on your loan may be higher or lower and your loan offers may not have multiple term lengths available. Actual rate depends on credit score, credit usage history, loan term, and other factors. Late payments or subsequent charges and fees may increase the cost of your fixed rate loan. There is no fee or penalty for repaying a loan early. Personal loans issued by Upgrade's bank partners. Information on Upgrade's bank partners can be found at https://www.upgrade.com/bank-partners/.
How to get a home improvement loan
No matter where you plan to get your home improvement loan, the steps will look something like this:
Step 1: Figure out how much you need. Gather cost estimates for your project.
Step 2: Gather application documents. You’ll need a few items to help lenders learn a bit about you. You’ll need your driver’s license, your Social Security number, and proof of income.
Step 3: Check your credit. You can get your reports from all three major credit reporting agencies at AnnualCreditReport.com. If you find any errors (and you might; Consumer Reports found 44% of adults have at least one), consider correcting them before you apply. Note that this can take up to 30 days, so only bother with corrections if they are depressing your score.
Step 4: Shop around and compare loan offers. Consider not just the loan amount but also the interest rates, fees, repayment schedule, and other loan terms. At Acorn Finance, you can look at offers from different lenders side by side. This lets you find the loan that fits your budget and your needs.
Step 5: Apply! How quickly you’ll hear back depends on where you apply. At Acorn, you may get pre-qualified in seconds and have your funds in as little as one day.
Meeting the eligibility requirements
Important
Understanding what makes someone eligible for a home improvement loan can help you increase your chances of getting the best offer. Your credit score is a three-digit number between 300 and 850; higher is better. The score is calculated based on factors that include:
- your history of paying debts on time
- your amount of credit utilization––that is, the amount of your available credit you are currently using
- how long you have used credit
- how many recent credit inquiries you have
- whether you have public records such as a bankruptcy or eviction in recent years
Lenders will also look at your debt-to-income (DTI) ratio, which is slightly different from credit utilization. Instead of measuring how much of your available credit you are using, this figure compares your current debt payments to your total income. You can calculate this number by adding up all your monthly debt payments and dividing them by your gross monthly income. Someone who pays $1,500 a month on their mortgage, $250 on a car payment, and $250 toward their credit card bills while earning $5000 a month has a DTI of 40%. A DTI of 35% or less is considered good.
Finally, you’ll need to have enough income to sustain regular loan payments. Look at the expected monthly payments and decide whether you will be able to comfortably make this payment every month for the life of the loan.
“When you think about applying for a loan, you need to think about affordability, regardless if it’s $5,000 or $50,000,” says Corey Sayers, Acorn Finance’s VP of Customer Experience. “Let’s say you can afford an extra $250 a month. If you only need to take out $5,000, your term can be five years, and that will get you about $250 a month. But, if you need a new garage, you still can only afford $250. That’s just what you can afford. What you need to look for is a loan with a longer term and potentially a lower APR.”
Pros and cons of a home improvement loan
Going into a borrower situation with eyes open can help you maximize the benefits and limit the drawbacks. Consider the pros and cons.
On the pro side:
- The money you spend on a home improvement can increase your quality of life and the value of your home.
- Choosing a home improvement loan over an alternative like a HELOC can protect your property. The loan is unsecured, so your home is not at risk if there are missed payments.
- You get your funds in a lump payment almost right away, so you can get started on your project.
All loans also have potential drawbacks:
- A home improvement loan will have a higher interest rate than a home equity loan, for instance, specifically because the loan is unsecured. This can mean paying more over the life of the loan.
- Your credit history will impact the offers you receive. With bad credit, you may only be offered loans with high interest and unfavorable terms.
Alternatives to a home improvement loan
Comparing all your options means looking not just at home improvement loans, but also at other types of loans.
A home equity loan is a loan secured by the equity you’ve built in your home. You’ll usually need at least 20% of the value of your home to qualify. Because they are secured, they have lower interest rates. But, if you are unable to pay, it can mean losing your home.
Home equity lines of credit (HELOCs) are revolving credit you draw against your equity. They are flexible, allowing you to determine how much you pull out. But, if you overuse them, they can keep you from building significant equity in your home.
Has the value of your home increased? A cash-out refi allows you to refinance your mortgage and get the increased value back in the form of a lump sum payment.
(If you have the funds, paying cash is also an option. However, this can mean not having the money available later on if an emergency arises.)
Compare all your options side by side to see which will cost you the most over the life of the loan and each month you make payments. Decide whether the terms of these loans fit your budget not just now, but throughout the life of the loan. By putting it all on paper, you can ensure you are making the wisest financial choice.
Tip
How Acorn Finance can help
Acorn Finance works with over a dozen vetted lenders to help you choose the right home improvement loan. We only list lenders who meet our strict criteria, such as zero prepayment penalties. “We go through a vetting process with our lenders,” says Sayers. “When you get offers through Acorn Finance, you can rest assured they are trustworthy and credible.”
It only takes a few minutes to get preapproved. Check your potential rates today.
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