How to Get a Home Improvement Loan

Home improvement loans are a type of personal loan that homeowners can use to complete renovations they can’t finance on their own. Unlike a home equity loan or a home equity line of credit (HELOC), home improvement loans are unsecured, so you aren’t using your house as collateral for the loan.

Although home improvement loan interest rates are typically more than a HELOC or home equity loan, interest rates are usually less than using a credit card to finance home renovations. 

And, unlike credit cards, home improvement loans are installment loans with a set interest rate, monthly payment, and term, making budgeting easier. If you want to learn how to get a home improvement loan, here are the requirements and step-by-step instructions for applying.  

Home improvement loan requirements

You can use home improvement loans to fund several house projects, including a new roof, bathroom renovations, kitchen upgrades, landscaping, and even a pool installation. Before applying, though, speak with your lender about their requirements for how you can use your home improvement loan.

Some lenders require you to work with a contractor and submit project estimates before you receive a loan. Other lenders allow you to use your loan for whatever home improvement project you want, even if it’s buying new furniture.

Unlike a home equity line of credit (HELOC), where you can draw on funds as you need them, a home improvement loan provides a lump sum. So, applying for a sum large enough to see your project through is important.

To find this number, make a list of your projected costs. Include estimates for:

• Materials
• Labor
• Permits
• Other fees

Then, add 10-20% to that number to cover unexpected issues that might pop up during your renovation.

Remember that you might not be approved for the amount you need, as lenders base their decisions on your income, credit history, and debt-to-income ratio.

Ask the expert

Catherine Valega

CFP®

The important thing to note when taking out a home improvement loan is: Do you have the cash flow necessary to make the required loan payments? The alternative is to start a savings regimen and hold off on the project until you can do it via your savings. 

Do I need a down payment for a home improvement loan?

Unlike a mortgage, home improvement loans do not require a downpayment because they are a type of personal loan. The benefit of not having a downpayment is you can conserve your cash for your home improvement project. However, home improvement loans can come with fees or other costs.

The Consumer Financial Protection Bureau explains some common fees for personal loans are origination fees, documentation fees, and late fees. Some lenders also have optional costs like credit insurance and disability insurance.

Do I need collateral to take out a home improvement loan?

Home improvement loans are usually unsecured, meaning you don’t need collateral to take one out. Because you don’t put up collateral, you will likely have a higher interest rate than secured loans.

For many borrowers, the flexibility of a home improvement loan is worth the higher interest rate since their home is not collateral for the loan. 

With a HELOC or home equity loan, a lender can foreclose your home if you don’t make your payments, but that’s not the case with a home improvement loan. If you default on a home improvement loan, it can negatively affect your credit, but you will not lose your house to foreclosure.

Other home improvement loan qualifications

Lenders consider several factors when determining whether or not you’re qualified for a loan. First, they’ll look at your credit history. Lenders typically give borrowers with very good or exceptional credit scores the most competitive interest rates. 

According to FICO, the credit score 90% of top lenders use, an exceptional credit score is above 800, and a very good credit score is between 740 and 799.

You may qualify for a home improvement loan with a good or even a fair credit score; however, your interest rates will likely be higher than those with excellent credit.

If you don’t know your FICO score, you can typically access it for free if you have a credit card offering score reporting as a benefit. You can also use several free services, like Credit Karma, to see your Vantage score, which is not the same as FICO but will give you an estimate of where your score currently stands.

Lenders will also assess your income and your debt-to-income ratio. While a high income helps you qualify for loans, your debt-to-income ratio is also important to lenders. 

Your DTI is the amount of minimum payments you make each month divided by your gross income. This tells lenders what percentage of your monthly income goes towards your debt payments. If your DTI is too high, lenders are less likely to approve you for a home improvement loan.

How to get a home improvement loan

Many different types of lenders offer home improvement loans. These include traditional banks, credit unions, online lenders, and many new FinTech companies. Consider all available options and compare them to get the best loan for your project.

Smaller lenders, like credit unions, might have more stringent requirements for home improvement loans, but you might get a more personalized experience working with them. Larger lenders can likely deposit your loan quickly, but the process might be less personalized.

Using a loan aggregator to see many different loan offers in one place is helpful. When comparing lenders, consider the APR, fees, loan terms, and their past reputation with customers.

Be careful of lenders who promise specific interest rates or large loan amounts. Always research lenders with the Better Business Bureau to ensure they are a reputable company. Also, if it seems you won’t qualify for a personal loan on your own, consider applying for one with a cosigner or a co-borrower to improve your chances of being approved for a loan.

How to apply for a home improvement loan

After carefully reviewing lenders, select three to five that you might want to use. Then, complete the steps below to apply for a home improvement loan. We’ve indicated how long each step typically takes in parentheses next to that step.

1. Check your credit report (one day): Last year, the Consumer Financial Protection Bureau received 443,321 complaints about credit report errors. So, even if think you have good credit, it’s a good idea to check for errors before applying for a loan.

Go to AnnualCreditReport and request a free copy of your credit report from each of the three main credit bureaus. Ensure your personal information is correct, and you have no adverse accounts.

If you have accounts in collections, call the phone number next to your adverse accounts and clear them before applying for any loans.

2. Gather your documents (two days): When you apply for a home improvement loan, you’ll need a few things to make the process smoother. Having your income and identification documents on hand is helpful, as many lenders will need you to upload them to verify your identity. If you’re applying with a co-signer or co-borrower, ask them to gather their documents, too.

3. Prequalify (one day): Now that your documents are in one place, prequalify with the lenders you want to use. Prequalifying is different from formally applying for a home improvement loan.

With prequalification, a lender will do a soft pull on your credit and make an introductory offer for your home improvement loan. A soft pull does not negatively affect your credit score, so you can apply to multiple lenders to see which offers the best rate. 

If you formally apply for a home improvement loan with several lenders, they will conduct a hard pull on your credit. This can temporarily lower your credit score. However, the effect will wear off over time as FICO only factors your hard inquiries over the last year.

4. Review your offers (two to three days): Review all aspects of your personal loan offers before making a lender decision. For example, it might seem like one lender offers a more competitive interest rate, but they might have high origination fees. 

Many people find it helpful to create a spreadsheet that compares all of their offers to see which is best for them. Don’t forget to make a column for customer complaints to see if any lenders have negative reviews from recent customers.

5. Submit a formal application (one day): Once you’ve reviewed your loan offers, choose a lender and apply. You’ll likely need to upload your documents and provide your social security number to apply for the loan formally. 

Pay attention to emails from your lender. They might request additional documentation after you submit your application. The faster you can upload those documents for verification, the quicker you can get your final loan decision.

6. Sign the final documents (one day): Hooray! Hopefully, your chosen lender offers you a loan and asks you to sign your final documents. Take the time to review the offer, including all the fine print. Make sure your loan term, APR, and any fees are clearly listed on your documents. When you’re ready, sign your final documents and return them to your lender.

7. Receive your lump sum (one day to a few weeks): Once you finalize the loan and sign your documents, you should receive a lump sum for your home improvement loan in a few days to a few weeks. Depending on your lender and their responsiveness, this entire process can take a week or up to a month or more.

Alternatives to a home improvement loan

It may be helpful to consider additional ways to secure the funds you need for home improvements. The following are alternatives to home improvement loans. 

Home equity line of credit (HELOC)

A HELOC allows you to borrow against the equity in your home. Unlike a home improvement loan, a HELOC is a revolving line of credit, similar to a credit card. It offers flexibility; you can draw from it whenever you need funds up to the credit limit. However, your home is collateral, so there’s a significant risk if you can’t repay the loan.

Home equity loan 

A home equity loan has similarities to home improvement loans and HELOCs. It offers a lump sum, like a home improvement loan, but it’s also secured against your home’s equity, similar to a HELOC. The key advantage here is the chance to secure a larger sum than a home improvement loan. Keep in mind that failure to repay could put your home at risk.

Cash-out refinance

Opting for a cash-out refinance requires you to refinance your mortgage for more than you owe and pocket the difference. This method differs from a home improvement loan, which isn’t linked to your mortgage. The primary allure is the potential for lower interest rates, but remember that you’ll likely need to cover closing costs, unlike a home improvement loan.

Credit card 

A credit card can be a viable choice if your home improvement project isn’t too pricey. Credit cards are unsecured, eliminating the risk to your home—but credit card interest rates can be high. Regular and prompt payments can help you avoid ballooning debt and improve your credit score.

Government assistance programs

Remember government assistance programs, such as HUD Title 1 Property Improvement loans or energy efficiency grants. They are limited in scope and have stringent eligibility requirements, but they could be helpful if your home improvement projects align with the program’s goals. Keep in mind that securing these funds can be competitive.

Ask the expert

Catherine Valega

CFP®

I don’t typically recommend a personal loan if my clients don’t have home equity to access. I would rather have them delay their plans and save up the cash. These loans come with high rates and high costs of making the payments (servicing them)—I’d hate for my clients to fall behind. Another option is to consider a 401(k) loan, which also entails risks.