Key Takeaways
- Follow a step-by-step plan to confidently secure a home improvement loan.
- The best loan for you depends on your equity, credit, and renovation needs.
- Prequalifying with multiple lenders can lead to better rates and fewer fees.
If you’re planning a renovation, a home improvement loan could be the key to making it happen. These loans offer a fast, convenient way to finance your project without tapping into savings. Still, figuring out how to get one can feel overwhelming. That’s why we’ve broken the process down into six simple steps to help you move forward with confidence.
Step 1: Estimate your project costs
Estimating the cost of your home repairs helps you determine how much you’ll eventually need to borrow. Start by considering the scope of the project and try to be as specific as possible. For example, if you’re remodeling your kitchen, you may want to replace the counters, backsplash, and flooring.
Next, create a detailed list of the materials needed and any delivery costs included. You can talk to contractors to get a sense of what the labor costs will be — make sure to get multiple quotes from contractors and don’t be afraid to negotiate on the price. It’s a good idea to budget an additional 10%-20% of your total estimated costs for any unexpected costs that arise.
Step 2: Check your credit and finances
You should review your credit score and debt-to-income (DTI) ratio before applying for a home improvement loan. Most lenders look for a credit score of 620 or higher, but a higher score allows you to qualify for the best rates and terms on your loan.
Your DTI ratio compares your total monthly debt payments to your income, and it helps lenders determine whether you can afford the loan payments. Most lenders like to see a DTI ratio of 36% or less, but some lenders are willing to go as high as 50%.
If your credit score is lower than you would like, you may want to pay down debt or dispute any errors on your credit report before applying. You can get a free copy of your credit report at AnnualCreditReport.com.
Step 3: Compare your loan options
You should decide on your loan type before shopping around for different lenders. There are several types of home improvement loans you can choose from, depending on your project needs or timeline:
| Loan Type | Best For | Key Features | Considerations |
|---|---|---|---|
| Personal Loan | Fast, unsecured financing | - No collateral required - Quick funding | - Higher interest rates - Short repayment terms |
| Home Equity Loan | Large, fixed-cost projects | - Lump sum payout - Fixed interest rate | - Home is collateral - Risk of foreclosure |
| HELOC | Projects with evolving costs | - Revolving credit line - Pay as you go - Interest-only payments available | - Variable interest rate - Home is collateral |
| Cash-Out Refinance | Borrowers with high equity and higher interest debt | - Replaces current mortgage - Potential for lower overall rate | - Closing costs - Extends or resets loan term |
| FHA 203(k) Loan | Buyers fixing up a home they’re purchasing | - Roll renovation costs into a single mortgage | - Requires more paperwork - Must meet FHA property standards |
Step 4: Shop around and prequalify
Once you’ve decided on your loan type, you can shop around and get prequalified with multiple lenders. During prequalification, the lender reviews your finances and does a soft pull on your credit report. Based on that information, they’ll give you an estimate of how much you can borrow and what your interest rate and repayment terms could look like.
Most experts recommend comparing quotes from at least three different lenders. Here’s what you should compare with each:
- APR: This is the interest rate and any additional fees charged on the loan.
- Repayment terms: This is how long you have to repay the loan. Personal loans often have repayment terms between two and seven years, while HELOCs and home equity loans may give you up to 30 years to repay the loan.
- Fees: Depending on the loan type, you may have an application fee, appraisal fee, or closing costs.
- Funding timeline: Some home improvement loans offer next-day funding, while others can take several weeks.
Step 5: Submit a full application
Once you’ve chosen a lender, it’s time to submit a formal application and undergo a hard credit inquiry. Most lenders let you apply online and will require the following documents:
- Government-issued ID
- Proof of income, like paystubs or W-2s
- Bank statements
- Project estimates or detailed plans from a contractor
In addition, home equity loans and HELOCs will often require an appraisal to determine the current market value of your home and calculate your home equity.
Step 6: Finalize the loan and begin your project
If your application is approved, your lender will send you a loan agreement to sign. Make sure you read through the agreement to ensure there are no errors and that you understand the loan terms.
Personal loans usually come with fast funding, and you could receive the money a day or two. It can take two to eight weeks to receive funding on a HELOC or home equity loan since the appraisal can affect the timeline.
Once your loan is funded and the home improvement project begins, it’s a good idea to set up autopay so you can stay on top of your loan payments. As a bonus, many lenders offer an interest rate reduction of around 0.25% for setting up autopay.
The bottom line
Getting a home improvement loan is a fairly straightforward process when you follow the right steps. The right loan type depends on your financial situation, project scope, and timeline. Comparing quotes from multiple lenders is the best way to find a loan that will meet your budget and project needs.
