FHA 203(k) loans provide funding to finance both a home’s purchase and the cost of repairing it. If you qualify, you can obtain one from an FHA-approved lender.
This type of loan is reserved for borrowers who intend to live in the home, not house-flippers or investors.
There are two types of 203(k) rehab loans: limited, for repairs less than $35,000, and standard, for more expensive projects.
When you buy a home, there are usually a few repairs to pay for. If you plan to take on a fixer-upper, you might be facing the prospect of many projects. If this is the case for you, you might be considering an FHA 203(k) loan.
What is an FHA 203(k) loan?
An FHA 203(k) loan, also known as an FHA 203(k) rehab loan or Section 203(k) loan, combines the financing for a home’s purchase and remodeling or repairs into a single loan. Along with these costs, you can also use a 203(k) loan to finance up to six months’ of mortgage payments while you live elsewhere during renovations.Like other FHA loans, a 203(K) loan is insured by the Federal Housing Administration and offered by FHA-approved mortgage lenders. It also comes with the requirement to pay FHA mortgage insurance.Types of 203(k) rehab loans
There are two types of FHA 203(k) loans: limited 203(k) and the more popular standard 203(k). Here’s an overview:
Key terms
Limited 203(k) loan:
Designed for non-structural projects valued at less than $35,000, with no minimum cost requirement
Standard 203(k) loan:
Designed for more extensive jobs, including major structural work like an addition, with a minimum cost requirement of $5,000
How does an FHA 203(k) loan work?
A 203(k) renovation loan can be a 15- or 30-year fixed-rate or adjustable-rate mortgage (ARM). The amount you can borrow depends on criteria such as your credit rating and income. The total amount borrowed through 203(k) loans must be within FHA loan limits for the area in which the home is located.
Generally, the most you can borrow for the loan is the lowest of the following:
The FHA’s maximum loan limit for the county where the property is located
The home’s before-renovation value plus improvement costs
The home’s after-renovation value
What can an FHA 203(k) loan be used for?
A standard 203(k) loan can cover many major projects, including:
Converting a property from one unit to up to four units, or the reverse
Foundation repairs
Adding or repairing a deck, patio or porch
Adding or remodeling a garage
Adding or repairing septic or well systems
Adding a fence
Adding accessibility features for those living with disabilities
Installing appliances
Landscaping
Remediating health and safety hazards, such as lead paint
This type of loan can’t cover improvements such as adding a gazebo, swimming pool or tennis court. It also can’t be used for repairs to co-ops or mixed-use properties, unless that property is primarily residential.
A limited 203(k) loan, in contrast, can cover upgrades like new carpeting or paint.
FHA 203(k) loan requirements
There are many requirements to qualify for an FHA renovation loan, including:
Occupation – The main restriction for an FHA 203(k) loan is that the borrower has to be the owner-occupant of the home. Investors are not eligible for this kind of loan, although in certain situations, nonprofit organizations might be allowed to obtain one.
Credit score and down payment – You’ll need a minimum credit score of 580 with 3.5 percent down, or a minimum score of 500 with a down payment of 10 percent.
Debt-to-income (RTI) ratio – Your debt-to-income (DTI) ratio, which measures your gross monthly income against your monthly debt payments, can’t exceed 43 percent.
Renovation rules – You can only use a limited 203(k) loan for non-structural renovations costing less than $35,000. For a standard 203(k) loan, the work has to involve major construction and cost at least $5,000.
Timeline – Generally, the work has to be completed within six months of closing.
How to get an FHA 203(k) loan
Once you’ve identified a home to buy and fix up, you can apply for a 203(k) loan with your lender. If you’re obtaining the standard version of the loan, the lender will assign a 203(k) consultant to your project. The consultant will visit the home to estimate repair costs. If you’re getting the limited 203(k), you’re not required to work with a consultant.
Once your lender signs off on these details and closes the loan, you’ll work with a licensed contractor to handle renovations. Ideally, this contractor should be familiar with 203(k) loans, especially the payment schedule and requirements. If you’re qualified, you might be able to do some or all of the work yourself, but you can’t use the loan proceeds for your labor cost.
The process from there works like a regular construction loan: The lender issues payments to the borrower at various phases of the renovation. As the project progresses, the consultant will inspect the work to authorize more payments. You’ll have six months to complete the renovations. Once the project is finished, you’ll provide a release letter and the consultant will evaluate the work.
FHA 203(k) loan pros and cons
An FHA 203(k) loan offers the opportunity to purchase a home that needs some work without having to obtain two loans. However, there are many rules to qualifying for this type of mortgage.
Pros of an FHA 203(k) loan
One loan for both purchase and renovations
Lower credit score requirement
Low minimum down payment requirement
Potentially lower interest rates compared to credit cards or home improvement loans
Can finance up to six months of mortgage payments if living elsewhere during renovations
Cons of an FHA 203(k) loan
Must plan to live in the home during or after renovation, for at least one year
FHA mortgage insurance payments required
Rates might be higher compared to buy-and-renovate conventional loans
Work must be completed in six months, in most cases
FHA 203(k) loan refinancing
You can use FHA 203(k) loans to purchase a fixer-upper or rehabilitate the home you already live in through a refinance. The process to refinance into a 203(k) loan is similar to a regular refinance, but you must meet the additional requirements of the 203(k) loan.
After refinancing, a portion of the 203(k) proceeds will pay off your existing mortgage, and the rest of the money will be kept in escrow until repairs are completed.You can also refinance an existing 203(k) mortgage through the FHA streamline program, which may help you get an even lower interest rate.
FHA 203(k) loan FAQ
An FHA 203(k) loan funds the purchase of a home and qualifying renovations, while a short-term construction loan funds renovations only. Once the project is complete, you can convert the construction loan to a regular mortgage. Depending on your credit and finances, a 203(k) loan might be easier to qualify for, but a construction loan has less restrictions around the types of improvements you can finance.
An FHA 203(k) loan can be used for single-family homes (including homes with accessory dwelling units, or ADUs), duplexes, triplexes or another multifamily home up to four units. It can also be used for an eligible condo or manufactured home, or a townhome. You might be able to use it for a mixed-use property, as well, provided the property is majority-residential.
If you’re qualified — say, a licensed general contractor — you might be able to do some or all of the work yourself. You cannot reimburse yourself for labor costs with the 203(k) loan proceeds, however.
An FHA 203(k) loan allows you to use funds for everything from minor repair needs to nearly the entire reconstruction of a home, as long as the original foundation is intact.
FHA 203(k) loans are one of several options to pay for home improvements. These alternatives include a conventional HomeStyle or CHOICERenovation loan; a cash-out refinance; a home equity line of credit (HELOC) or home equity loan; credit cards; or personal loans. You might also explore co-investment or shared equity companies, which provide financing in exchange for a piece of your home’s appreciation when you sell.
MoMo Productions/ Getty Images; Illustration by Austin Courregé/Bankrate
Portions of this article were drafted using an in-house natural language generation platform. The article was reviewed, fact-checked and edited by our editorial staff.
Key takeaways
VA loans are mortgages guaranteed by the U.S. Department of Veterans Affairs, available to eligible veterans, active-duty service members and surviving spouses.
VA loans can be used to purchase a primary residence, refinance a current mortgage or cover renovation costs.
VA loans offer several benefits, including no required down payment, no private mortgage insurance (PMI) and competitive interest rates.
A VA loan is a great option for you if you’re a qualifying active-duty military personnel or veteran. They often have more relaxed financial requirements than conventional loans, requiring no down payment or private mortgage insurance. They also typically have lower interest rates than FHA and conventional loans.
Here’s a breakdown of what VA loans are, how they work and how you can get one.
What is a VA loan?
A VA loan is a loan guaranteed by the U.S. Department of Veterans Affairs (VA). That’s not to say the VA provides these loans. Instead, mortgage lenders offer VA loans, knowing that the government guarantees them. This makes lenders more confident in lending, often offering a VA loan with a lower interest rate than a conventional mortgage.
The VA doesn’t officially set a credit score requirement for these loans. Instead, it leaves this up to the lender, with lenders requiring anywhere from a 580 to 640 minimum score. VA loans don’t require a down payment, which can make homeownership more attainable for those who qualify because you’ll need less money upfront.
How does a VA loan work?
Getting a VA loan is similar to securing a conventional loan.
Basically, you fill out paperwork from the VA that verifies your eligibility for the program. You also receive what’s known as your entitlement, which is the dollar amount guaranteed on each VA loan. While VA loans technically have no loan limit, lenders might be willing to loan up to four times the amount of your entitlement.
You can get a VA loan with no money down and, unlike other loans, you won’t have to pay for mortgage insurance. That’s because the government guarantees your loan. However, you’ll need to pay a funding fee, which costs a certain percentage of the loan total. This fee keeps the program functioning so future veterans and service members can use it.
Types of VA loans
VA loan type
Description
VA mortgage
Allows qualified service members to purchase a home with no minimum down payment.
VA construction loan
Eligible service members can use this loan to build the home of their dreams.
VA rate-term refinance
Allows service members without an existing VA loan to change their loan term or secure a lower interest rate.
VA cash-out refinance
Allows service members to swap their conventional mortgage with a VA loan, with an option to turn home equity into cash if needed.
IRRRL loan
Allows service members to replace a VA mortgage with a VA Interest Rate Reduction Refinance Loan (IRRRL), which can offer lower interest rates. It can also be used to change from an adjustable-rate loan to a fixed-rate loan.
VA rehab and refinance
Can be used by service members to finance the cost of improvements made to the home.
VA jumbo loan
Allows service members to finance a home with a sales price exceeding the conforming loan limits.
Native American loan
Available to Native American veterans to help them purchase, build, improve or refinance a home located on federal trust land.
Who qualifies for a VA loan?
The VA sets service requirements for active-duty military personnel and veterans to qualify for a VA loan. You can check the full eligibility requirements on the VA’s website, but the basics are:
You’re currently on active military duty, or you’re a veteran who was honorably discharged and met the minimum service requirements.
You served at least 90 consecutive active days during wartime or at least 181 consecutive days of active service during peacetime.
Or, you served for more than six years in the National Guard or Selective Reserve.
If your spouse died in the line of duty, you may qualify for a VA loan.
The first step in applying for a VA loan is getting a VA Certificate of Eligibility (COE). This certificate shows the lender that you meet the VA loan requirements for eligibility.
How to apply for a VA loan Certificate of Eligibility (COE)
You can get a VA loan Certificate of Eligibility by applying through your eBenefits portal online or applying through your lender.
To apply, you need to provide some data based on your current status. Veterans need to provide a DD Form 214, and active-duty service members need a signed statement of service. A statement of service should include:
Full name
Date of birth
Social Security number
The date you started duty
Any lost time
Name of the command providing the information
Different requirements may apply for National Guard or Reserve members, as well as surviving spouses. You can find more information through the VA’s benefits website, or by speaking to a qualified lender.
Other VA loan requirements
You should also keep these VA loan requirements and rules in mind:
VA loan limit: As of 2020, if you have full entitlement, there is no limit on the size of your loan. However, your lender may impose its own terms, and your entitlement will still be pegged to conforming mortgage limits.
You do have a home loan limit if you have remaining entitlement: You have an active VA loan you’re still paying back; or you paid a previous VA loan in full and still own the home; or you refinanced your VA loan into a non-VA loan and still own the home; or you had a compromise claim (or short sale) on a previous VA loan and didn’t repay it in full; or you had a deed in lieu of foreclosure on a previous VA loan; or you had a foreclosure on a previous VA loan and didn’t repay it in full.
If you have remaining entitlement, your VA home loan limit is based on the county loan limit where you live. This means that if you default on your loan, the VA will pay your lender up to 25 percent of the county loan limit minus the amount of your entitlement you’ve already used. Check your county loan limit here.
Property type: Investment properties and vacation homes cannot be purchased using VA loan proceeds. Furthermore, you must occupy the home and use it as your primary residence.
Credit score: The VA does not specify a minimum credit score requirement. However, borrowers might have a hard time getting approved by a lender if they don’t have at least a 620 FICO Score.
Income: Borrowers need to show they have the income to make the mortgage payments. It’s equally important to not have a huge debt load since the lender will assess your debt-to-income ratio (DTI), or the percentage of your monthly income that’s spent on debt payments.
Assets and down payment: There is no down payment requirement for VA loans, but the lender may have overlays (or specific criteria) that mandate a down payment in place for borrowers with lower credit scores.
Reserve funds: Many lenders require borrowers to have an adequate amount of reserves — generally two to three months of mortgage payments — before clearing you to close on your loan.
It’s also possible to use home loan benefits after bankruptcy, as long as sufficient time has passed, typically two years after filing for Chapter 7 bankruptcy or 12 months after Chapter 13 bankruptcy.
VA home loan pros and cons
For those who are eligible, VA loans have many benefits, but they also have drawbacks to consider.
Pros of a VA loan
Some of the key advantages of VA loans include:
Lower borrowing costs: VA loans can be cheaper than their conventional mortgage counterparts.
No down payment: VA loans allow you to purchase a home with zero down payment, making homeownership more accessible for those who may struggle to save a large lump sum. You need at least 3 percent down for a conventional mortgage.
No mortgage insurance: Unlike many other types of mortgages, VA loans do not require you to pay private mortgage insurance (PMI), potentially saving you hundreds of dollars per month.
Competitive interest rates: Because the government guarantees these loans, lenders are able to offer lower interest rates than you’d typically find with conventional loans.
Capped lender fees: The VA limits lender fees (like loan origination fees) to 1 percent of the loan amount. This can result in lower closing costs than other loan types.
Cons of a VA loan
Despite the many benefits, VA loans also have a few downsides to consider:
VA funding fee: VA loans come with a funding fee that can vary depending on your military category, down payment amount and whether you’ve previously used a VA loan. You can finance this fee into the loan amount, adding to the total cost of the loan, or you can pay it upfront at closing.
Limited to primary residences: You can only use VA loans to purchase a primary residence, not vacation homes or investment properties. However, you can buy up to a four-unit property with a VA loan as long as one unit is your primary residence.
Not all properties qualify: Not every property will meet the VA’s minimum property requirements (MPRs), which can limit your potential housing options.
Longer closing process: The VA loan process can take slightly longer than other loan types due to extra steps such as the VA appraisal.
How to apply for a VA loan
After you’ve obtained your COE and are ready to apply, there are a few steps you need to take:
Gather your financial paperwork.
Look for lenders that offer VA loans.
Get approved for a VA loan through at least three lenders.
Compare each lender’s offer and choose the best option.
Shop for a home and submit an offer.
Have a seller accept your offer and get a signed purchase agreement with the seller.
Get a VA home appraisal and inspection.
Work with the lender through the underwriting process, promptly responding to questions and requests for documentation.
If you’re struggling with your VA loan, there’s extra help available. The VA can help you negotiate with your lender if you can’t make payments. With the help of the VA, it’s possible to avoid foreclosure through loan modification or other repayment plans. Call 877-827-3702 if you need help.
VA loan FAQ
VA loans can have term lengths of 10 to 30 years. In addition, they can be fixed-rate or adjustable-rate mortgages (ARMs). The interest rates for VA loans are typically lower than those for conventional loans, mainly because the VA guarantees a portion of the loan, which reduces the risk for the lender. These rates change frequently, so check Bankrate’s VA home loan rates to compare offers from different lenders.
A key feature of VA loans is the entitlement. This is the amount of the loan that the VA will guarantee to the lender if you default. There are two types of entitlement:
Basic entitlement: Up to $36,000 for loans worth less than $144,000, or 25 percent for loans of that amount or more.
Bonus entitlement: Up to 25 percent of the Federal Housing Finance Agency (FHFA) loan limit, minus the basic entitlement.
If you’re purchasing a loan that costs more than $144,000, the bonus entitlement can be used.
No, VA loans don’t require PMI or any other mortgage insurance. That’s because the VA loan entitlement usually amounts to more than 20 percent of the home’s value. However, while you won’t need to pay for mortgage insurance, you will have to pay a funding fee.
As with any mortgage, different lenders have various closing costs. You might need to pay for discount points, a credit check, VA appraisal fees, title insurance and other costs, including local and state taxes. While you don’t have to worry about PMI, you do have to pay a VA funding fee. Your VA funding fee depends on the size of your VA loan down payment, and whether it’s your first-time use of the benefit.
Down payment
First-time use
Subsequent use
0%-5%
2.15%
3.30%
5%-9.99%
1.50%
1.50%
10% or more
1.25%
1.25%
So, while a VA loan down payment isn’t required, it can save you money to make a down payment.
Quick note: Disabled veterans who receive disability benefits are exempt from the VA funding fee.
Also, it’s possible to wrap your VA closing costs into the loan amount. However, that increases how much you need to borrow and can cost you more.
Home renovations can be expensive. But the good news is that you don’t have to pay out of pocket.
Home improvement loans let you finance the cost of upgrades and repairs to your home.
Some — like the FHA 203(k) mortgage — are specialized for home renovation projects, while second mortgage options — like home equity loans and HELOCs — can provide cash for a remodel or any other purpose. Your best financing option for home improvements depends on your needs. Here’s what you should know.
Check home improvement loan options and rates. Start here
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What is a home improvement loan?
A home improvement loan is a financial tool that allows you to borrow money for various home projects, such as repairs, renovations, or upgrades.
Unlike a secured loan like a second mortgage, home improvement loans are often unsecured personal loans, meaning you don’t have to put up your home as collateral. You get the money in a lump sum and pay it back over a predetermined period, which can range from one to seven years.
Now, you might be wondering how this is different from a home renovation loan. While the terms are often used interchangeably, there can be subtle differences.
Home improvement loans are generally more flexible and can be used for any type of home project, from installing a new roof to landscaping. Home renovation loans, on the other hand, are often more specific and may require you to use the funds for particular types of renovations, like kitchen or bathroom remodels.
How does a home improvement loan work?
So, you’ve decided to spruce up your home, and you’re considering a home improvement loan. But how does it work? Once you’re approved, the lender will give you the money in a lump sum. You start repaying the loan almost immediately, usually in fixed monthly installments. The interest rate you’ll pay depends on various factors, including your credit score and the lender’s terms.
Be mindful of additional costs like origination fees, which can range from 1% to 8% of the loan amount. Unlike a credit card, where you can keep using the available credit as you pay it off, the loan amount is fixed. If you find that you need more money for your project, you’ll have to apply for another loan, which could affect your credit score.
Home improvement loan rates
Interest rates for home improvement loans can vary widely, generally ranging from 5% to 36%. Your credit score plays a significant role in determining your rate—the better your credit, the more favorable your rate. Some lenders even offer an autopay discount if you link a bank account for automatic payments.
You can also prequalify to check your likely interest rate without affecting your credit score, making it easier to plan for the loan purpose, whether it’s a new kitchen or fixing a leaky roof.
So, whether you’re dreaming of solar panels or finally fixing up your master bedroom, a home improvement loan can be a practical way to finance your projects. Just make sure to read the fine print and understand all the terms, including any potential autopay discounts and bank account requirements, before you apply.
Types of home improvement loans
1. Home equity loan
A home equity loan (HEL) is a financial instrument that lets you borrow money using the equity you’ve built up in your home as collateral. The equity is determined by subtracting your existing mortgage loan balance from your current home value. Unlike a cash-out refinance, a home equity loan “issues loan funding as a single payment upfront. It’s similar to a second mortgage,” says Bruce Ailion, Realtor and real estate attorney. “You would continue making payments on your original mortgage while repaying the home equity loan.”
Check home equity loan options and rates. Start here
This kind of loan is particularly useful for big, one-time expenditures like home remodeling. It offers a fixed interest rate, and the loan terms can range from five to 30 years. You could potentially borrow up to 100% of your home’s equity.
However, there are some cons to consider. Since you’re essentially taking on a second loan, you’ll have an additional monthly payment if you still have a balance on your original mortgage. Also, the lender will usually charge closing costs ranging from 2% to 5% of the loan balance, as well as potential origination fees. Because the loan provides a lump-sum payment, careful budgeting is necessary to ensure the funds are used effectively.
As a bonus, “a home equity loan, or HELOC, may also be tax-deductible,” says Doug Leever with Tropical Financial Credit Union, member FDIC. “Check with your CPA or tax advisor to be sure.”
2. HELOC (home equity line of credit)
A Home Equity Line of Credit (HELOC) is another option for tapping into your home’s equity without going through the process of a full refinance. Unlike a standard home equity loan that provides a lump sum upfront, a HELOC functions more like a credit card. You’re given a pre-approved limit and can borrow against that limit as you need, paying interest only on the amount you’ve actually borrowed.
Check your HELOC options. Start here
While there’s more flexibility because you don’t have to borrow the entire amount at once, be aware that by the end of the term, “the loan must be paid in full. Or the HELOC can convert to an amortizing loan,” says Ailion. “Note that the lender can be permitted to change the terms over the loan’s life. This can reduce the amount you can borrow if, for instance, your credit goes down.”
The pros of a HELOC include minimal or potentially no closing costs, and loan payments that vary according to how much you’ve borrowed. It offers a revolving balance, which means you can re-use the funds after repayment. This kind of financial instrument may be ideal for ongoing or long-term projects that don’t require a large sum upfront.
“HELOCs offer flexibility, and you only pull money out when needed, within the maximum loan amount. And the credit line is available for up to 10 years, which is your repayment period.” Leever says.
3. Cash-out refinance
A cash-out refinance is a viable option if you’re considering home improvements or other significant financial needs. When opting for a cash-out refinance, you essentially take on a new, larger mortgage than your existing one and then pocket the difference in cash.
This cash comes from your home’s value and can be used for various purposes, including home improvement projects like finishing a basement or remodeling a kitchen. However, the money can also be used for other things, like paying off high-interest debt, covering education expenses, or even buying a second home. Importantly, a cash-out refinance is most beneficial when current market rates are lower than your existing mortgage rate.
Check your eligibility for a cash-out refinance. Start here
The advantages of going for a cash-out refinance include the opportunity to reduce your mortgage rate or loan term, which could potentially result in paying off your home earlier. For instance, if you initially had a 30-year mortgage with 20 years remaining, you could refinance to a 15-year loan, effectively paying off your home five years ahead of schedule. Plus, you only have to worry about one mortgage payment.
However, there are downsides. Cash-out refinances tend to have higher closing costs that apply to the entire loan amount, not just the cash you’re taking out. The new loan will also have a larger balance than your current mortgage, and refinancing effectively restarts your loan term length.
4. FHA 203(k) rehab loan
The FHA 203(k) rehab loan is backed by the Federal Housing Administration that consolidates the cost of a home mortgage and home improvements into a single loan, which makes it particularly useful for those buying fixer-uppers.
Check your eligibility for an FHA 203(k) loan. Start here
With this program, you don’t need to apply for two different loans or pay closing costs twice; you finance both the house purchase and the necessary renovations at the same time. The loan comes with several benefits like a low down payment requirement of just 3.5% and a minimum credit score requirement of 620, making it accessible even if you don’t have perfect credit. Additionally, first-time home buyer status is not a requirement for this loan.
However, there are some limitations and downsides to be aware of. The FHA 203(k) loan is specifically designed for older homes in need of repairs, rather than new properties. The loan also includes both upfront and ongoing monthly mortgage insurance premiums. Renovation costs have to be at least $5,000, and the loan restricts the use of funds to certain approved home improvement projects.
According to Jon Meyer, a loan expert at The Mortgage Reports, “FHA 203(k) loans can be drawn out and difficult to get approved. If you go this route, it’s important to choose a lender and loan officer familiar with the 203(k) process.”
5. Unsecured personal loan
If you’re looking to finance home improvements but don’t have sufficient home equity, a personal loan could be a viable option. Unlike home equity lines of credit (HELOCs), personal loans are unsecured, meaning your home is not used as collateral. This feature often allows for a speedy approval process, sometimes getting you funds on the next business day or even the same day.
Check home improvement loan options and rates. Start here
The repayment terms for personal loans are less flexible, usually ranging between two and five years. Although you’ll most likely face closing costs, personal loans can be easier to access for those who don’t have much home equity to borrow against. They can also be a good choice for emergency repairs, such as a broken water heater or HVAC system that needs immediate replacement.
However, there are notable downsides to consider. Unsecured personal loans generally have higher interest rates compared to HELOCs and lower borrowing limits. The short repayment terms could put financial strain on your budget. Additionally, you may encounter prepayment penalties and expensive late fees. Financial expert Meyer describes personal loans as the “least advisable” option for homeowners, suggesting that they should be considered carefully and perhaps as a last resort.
6. Credit cards
Using a credit card can be the fastest and most straightforward way to finance your home improvement projects, eliminating the need for a lengthy loan application. However, you’ll need to be cautious about credit limits, especially if your renovation costs are high.
You might need a card with a higher limit or even multiple cards to cover the costs. The interest rates are generally higher compared to home improvement loans, but some cards offer an introductory 0% annual percentage rate (APR) for up to 18 months, which can be a good deal if you’re sure you can repay the balance within that time frame.
Check home improvement loan options and rates. Start here
Credit cards might make sense in emergency situations where you need immediate funding. For longer-term financing, though, they’re not recommended. If you do opt for credit card financing initially, you can still get a secured loan later on to clear the credit card debt, thus potentially saving on high-interest payments.
How do you choose the best home improvement loan for you?
The best home improvement loan will match your specific lifestyle needs and unique financial situation. So let’s narrow down your options with a few questions.
Check your home improvement loan options. Start here
Do you have home equity available?
If so, you can access the lowest rates by borrowing against the equity in your home with a cash-out refinance, a home equity loan, or a home equity line of credit.
Here are a few tips for choosing between a HELOC, home equity loan, or cash-out refi:
Can you get a lower interest rate? If so, a cash-out refinance could save money on your current mortgage and your home improvement loan simultaneously
Are you doing a big, single project like a home remodel? Consider a simple home equity loan to tap into your equity at a fixed rate
Do you have a series of remodeling projects coming up? When you plan to remodel your home room by room or project by project, a home equity line of credit (HELOC) is convenient and worth the higher loan rate compared to a simple home equity loan
Are you buying a fixer-upper?
If so, check out the FHA 203(k) program. This is the only loan on our list that bundles home improvement costs with your home purchase loan. Just review the guidelines with your loan officer to ensure you understand the disbursement of funds rules.
Taking out just one mortgage to cover both needs will save you money on closing costs and is ultimately a more straightforward process.
“The only time I’d recommend the FHA203(k) program is when buying a fixer-upper,” says Meyer. “But I would still advise homeowners to explore other loan options as well.”
Do you need funds immediately?
When you need an emergency home repair and don’t have time for a loan application, you may have to consider a personal loan or even a credit card.
Which is better?
Can you get a credit card with an introductory 0% APR? If your credit history is strong enough to qualify you for this type of card, you can use it to finance emergency repairs. But keep in mind that if you’re applying for a new credit card, it can take up to 10 business days to arrive in the mail. Later, before the 0% APR promotion expires, you can get a home equity loan or a personal loan to avoid paying the card’s variable-rate APR
Would you prefer an installment loan with a fixed rate? If so, apply for a personal loan, especially if you have excellent credit
Just remember that these options have significantly higher rates than secured loans. So you’ll want to reign in the amount you’re borrowing as much as possible and stay on top of your payments.
How to get a home improvement loan
Getting a home improvement loan is similar to getting a mortgage. You’ll want to compare rates and monthly payments, prepare your financial documentation, and then apply for the loan.
Check home improvement loan options and rates. Start here
1. Check your financial situation
Check your credit score and debt-to-income ratio. Lenders use your credit report to establish your creditworthiness. Generally speaking, lower rates go to those with higher credit scores. You’ll also want to understand your debt-to-income ratio (DTI). It tells lenders how much money you can comfortably borrow.
2. Compare lenders and loan types
Gather loan offers from multiple lenders and compare costs and terms with other types of financing. Look for any benefits, such as rate discounts, a lender might provide for enrolling in autopay. Also, keep an eye out for disadvantages, including minimum loan amounts or expensive late payment fees.
3. Gather your loan documents
Be prepared to verify your income and financial information with documentation. This includes pay stubs, W-2s (or 1099s if you’re self-employed), and bank statements, to name a few.
4. Complete the loan application process
Depending on the lender you choose, you may have a fully online loan application, one that is conducted via phone and email, or even one that is conducted in person at a local branch. In some cases, your mortgage application could be a mix of these options. Your lender will review your application and likely order a home appraisal, depending on the type of loan. You’ll get approved and receive funding if your finances are in good shape.
Get started on your home improvement loan. Start here
Home improvement loan lenders
When considering a home improvement loan, it’s necessary to explore various lending options to find the one that best suits your needs. The lending landscape for home improvement is diverse, featuring traditional banks, credit unions, and online lenders. Each type of lender offers different interest rates, loan terms, and eligibility criteria.
It’s advisable to prequalify with multiple lenders to get an estimate of your loan rates, which generally doesn’t affect your credit score. This way, you can compare offers and choose the most favorable terms for your renovation project.
Among the popular choices in the market, Sofi and LightStream stand out for their competitive rates, easy online application, and customer-friendly terms. Both are equal housing lenders, ensuring they adhere to federal anti-discrimination laws. In addition to these, other lenders like Wells Fargo and LendingClub also offer home improvement loans with varying terms and conditions.
How can I use the money from a home improvement loan?
When you do a cash-out refinance, a home equity line of credit, or a home equity loan, you can use the proceeds on anything — even putting the cash into your checking account. You could pay off credit card debt, buy a new car, pay off student loans, or even fund a two-week vacation. But should you?
It’s your money, and you get to decide. But spending home equity on improving your home is often the best idea because you can increase the value of your home. Spending $40,000 on a new kitchen remodel or $20,000 on finishing your basement could add significant value to your home. And that investment would be appreciated along with your home.
That said, if you’re paying tons of interest on credit card debt, using your home equity to pay that off would make sense, too.
Average costs of home renovations
Home renovations can vary widely in cost depending on the scope of the project, the quality of the materials used, and the region where you live. However, here’s a general idea of what you might expect to pay for various types of home renovations.
Renovation Type
Average Cost Range
Kitchen Remodel
$10,000 – $50,000
Bathroom Remodel
$5,000 – $25,000
Master Bedroom Remodel
$1,500 – $10,000
New Roof
$5,000 – $11,000
Exterior Paint
$6,000 – $20,000
Interior Paint
$1,500 – $10,000
New Deck
$15,000 – $40,000
Solar Panel Installation
$15,000 – $25,000
Window Replacement
$5,000 – $15,000
The information is based on data from HomeGuide.com and is current as of August 2023.
Please note that these are just average figures, and the actual costs can vary. For instance, a high-end kitchen remodel could cost significantly more, especially if you’re planning to use custom cabinetry and high-end appliances. Similarly, the cost of a new deck can vary depending on the size and type of materials used.
Home improvement loans FAQ
Check home improvement loan options and rates. Start here
What type of loan is best for home improvements?
The best loan for home improvements depends on your finances. If you have accumulated a lot of equity in your home, a HELOC, or home equity loan, might be suitable. Or, you might use a cash-out refinance for home improvements if you can also lower your interest rate or shorten the current loan term. Those without equity or refinance options might use a personal loan or credit cards to fund home improvements instead.
Should I get a personal loan for home improvements?
That depends. We’d recommend looking at your options for a refinance or home equity-based loan before using a personal loan for home improvements. That’s because interest rates on personal loans are often much higher. But if you don’t have a lot of equity to borrow from, using a personal loan for home improvements might be the right move.
What credit score is needed for a home improvement loan?
The credit score requirements for a home improvement loan depend on the loan type. With an FHA 203(k) rehab loan, you likely need a good credit score of 620 or higher. Cash-out refinancing typically requires at least 620. If you use a HELOC, or home equity loan, for home improvements, you’ll need a FICO score of 680–700 or higher. For a personal loan or credit card, aim for a score in the low-to-mid 700s. These have higher interest rates than home improvement loans, but a stronger credit profile will help lower your rate.
What is the best renovation loan
If you’re buying a fixer-upper or renovating an older home, the best renovation loan might be the FHA 203(k) mortgage. The 203(k) rehab loan lets you finance (or refinance) the home and renovation costs into a single loan, so you avoid paying double closing costs and interest rates. If your home is newer or of higher value, the best renovation loan is often a cash-out refinance. This lets you tap the equity in your current home and refinance into a lower mortgage rate at the same time.
Is a home improvement loan tax deductible?
Home improvement loans are generally not tax-deductible. However, if you finance your home improvement using a refinance or home equity loan, some of the costs might be tax-deductible.
Disclaimer: The Mortgage Reports do not provide tax advice. Be sure to consult a tax professional if you have any questions about your taxes.
Shop around for your best home improvement loan
As with anything in life, it pays to compare all your options. So don’t just settle on the first loan offer you find.
Compare lenders, mortgage types, rates, and terms carefully to find the best loan for home improvements.
Time to make a move? Let us find the right mortgage for you
Many people mistakenly believe they can’t afford to buy a home because they don’t really know what their options are. Fortunately, home loans are not one-size-fits-all. There are various mortgages available to suit your budget and preferences.
So, before you start visiting open houses, take some time to familiarize yourself with the different home loans that are available. Going into the home buying process informed could help you save a lot of money on your down payment, interest, and fees.
The 8 Types of Mortgage Loans Available
Understanding the different types of mortgage loans will help you choose the option that’s best suited for you. Let’s look at a brief overview of the eight types of mortgages available in 2024.
1. Conventional Loans
A conventional loan is a mortgage that’s not issued by the federal government. There are two different types of conventional mortgages you can choose from: conforming and non-conforming loans.
A conforming loan falls within the guidelines laid out by Fannie Mae and Freddie Mac. You’ll take out a conforming loan through a private lender like a bank, credit union, or mortgage company. Since the government doesn’t guarantee the loan, conventional mortgages typically come with more stringent lending requirements.
According to the CFPB, the maximum loan amount for a conventional loan is $484,350. However, it may be as high as $726,525 in counties with a high cost of living. You’ll have to take out private mortgage insurance (PMI) if you don’t have a 20% down payment.
Conventional loans are fixed-rate mortgages, which means your monthly mortgage payment remains the same throughout the entire life of the mortgage loan. The terms typically range from 10 to 30 years:
30-year fixed-rate mortgage
20-year fixed-rate mortgage
15-year fixed-rate mortgage
10-year fixed rate mortgage
Pros:
It can be used to purchase a primary home or an investment property
Tends to cost less than other types of loans
You can cancel your private mortgage insurance (PMI) once you reach 20% equity in your home
Cons:
Must have a minimum FICO score of 620 or higher
Harder to qualify for than government-backed loans
You’ll need to have a low debt-to-income ratio to qualify
2. Conventional 97 Mortgage
A conventional 97 mortgage is similar to a conventional loan in that it’s widely available to various borrowers. The main difference is that with this type of home loan, you only have to pay a 3% down payment.
The program is available for first-time and repeat home buyers. However, it must be your primary place of residence, and the maximum loan amount is $510,400.
Pros:
Widely available to most borrowers
Only requires a 3% down payment
Available for first-time and repeat homebuyers
Cons:
Cannot be used to purchase investment properties
The maximum loan amount is $510,400
Requires a minimum FICO score of 660 or higher
3. FHA Loans
FHA loans are backed by the Federal Housing Administration and are a popular option for first-time home buyers. To qualify, you need to have a 3.5% down payment and a minimum credit score of 580.
If you have a credit score of 500 or higher, you can qualify for an FHA loan with a 10% down payment. These flexible requirements make FHA loans a suitable option for borrowers with bad credit.
To qualify for an FHA home loan, you must have a debt-to-income ratio of 43% or less. These loans can’t be used to purchase investment properties, and your home must meet the FHA’s lending limits.
These limits vary by state, so you’ll need to check the FHA’s website to see what the guidelines are for your area.
Pros:
Loans come with low down payment options
A viable option for borrowers with bad credit
Available for first-time and repeat homeowners
Cons:
Loans can’t be taken out for investment properties
If your credit score is below 580, a 10% down payment is required
You must have a debt-to-income ratio below 43%
Mandatory mortgage insurance premiums
4. FHA 203(k) Rehab Loans
An FHA 203(k) rehab loan is sometimes referred to as a renovation loan. It allows home buyers to finance the purchase of their home and any necessary renovations with a single loan.
Many people purchase older homes to fix them up. Instead of taking out a mortgage and then applying for a home renovation loan, you can accomplish both within a single mortgage.
A rehab loan is similar to an FHA loan in that you’ll need a 3.5% down payment. However, the credit requirements are stricter, and you’ll need a minimum credit score of 640 to qualify.
Pros:
Allows you to buy a home and finance the remodel within one mortgage
Requires a minimum 3.5% down payment
Easier to qualify since the FHA backs your loan
Cons:
Credit requirements are more stringent than typical FHA loans
You must hire approved contractors and cannot DIY the renovations
The closing process takes longer than other types of mortgages
5. VA Loans
The Department of Veteran Affairs guarantees VA loans. These loans are designed to make it easier for veterans and service members to qualify for affordable mortgages.
One of the biggest advantages of taking out a VA loan is that it doesn’t require a down payment or mortgage insurance premium (MIP). And there are no listed credit requirements, though the lender can set their own minimum credit requirements. VA loans typically come with a lower interest rate than FHA and conventional loans.
To qualify for a VA loan, you must either be active duty military, a veteran or honorably discharged. You’ll need to apply for your mortgage through an approved VA lender.
Pros:
No down payment required
No PMI required
Flexible credit requirements
Cons:
Must be a veteran to qualify
Some sellers will not want to deal with a VA loan
6. USDA Loans
A USDA loan is a type of mortgage that’s available for rural and suburban home buyers. It’s a viable option for borrowers with lower credit scores that are having a hard time qualifying for a traditional mortgage.
USDA loans are backed by the U.S. Department of Agriculture, and they help low-income borrowers find housing in rural areas. USDA loans do not require a down payment, but you will need a minimum credit score of 640 to qualify.
You will need to meet the USDA’s eligibility requirements to qualify for the loan. But according to the department’s property eligibility map, over 95% of the U.S. is eligible.
Pros:
No down payment required
A practical option for low-income borrowers
Available to first-time and repeat home buyers
Cons:
A minimum credit score of 640 is required
Housing is limited to rural and suburban areas
7. Jumbo Loans
A jumbo loan is a mortgage that exceeds the financing guidelines laid out by the Federal Housing Finance Agency. These loans are unable to be purchased or guaranteed by Fannie Mae or Freddie Mac.
A jumbo mortgage is financing for luxury homes in competitive real estate markets, and the limits vary by state. In 2024, the FHFA raised the limits for a one-unit property to $766,550, increasing from $726,200 in 2023. In certain high-cost areas, the limits for jumbo loans vary, reaching up to $1,149,825. These jumbo loans are for mortgages that exceed the set limits in their respective counties.
If you’re hoping to buy a home that costs more than $1 million, you’ll need to take out a super jumbo loan. These loans provide up to $3 million to purchase your home. Both jumbo and super jumbo mortgages can be difficult to qualify for and require excellent credit.
Pros:
These loans make it possible to purchase large homes in expensive areas
Typically comes with flexible loan terms
Cons:
Jumbo loans and super jumbo loans come with higher interest rates
You’ll need a good credit history to qualify
8. Adjustable Rate Mortgages (ARMs)
Unlike a fixed-rate mortgage, where the interest rate is set for the life of the loan, an adjustable-rate mortgage (ARM) comes with interest rates that fluctuate. Your interest rate depends on the current market conditions.
When you first take out an ARM, you will typically start with a fixed rate for a set period of time. Once that introductory period is up, your interest rate will adjust on a monthly or annual basis.
An ARM can be a suitable option for some borrowers because your interest rate will likely be low for the first couple of years you own the home. But you need to be comfortable with a certain level of risk.
And if you choose to go this route, you should look for an ARM that caps the amount of interest you pay. That way, you won’t find yourself unable to afford your monthly payments when the interest rates reset.
4 Types of ARMs
There are 4 different types of adjustable-rate mortgages typically offered:
One Year ARM – The one-year adjustable-rate mortgage interest rate changes every year on the anniversary of the loan.
10/1 ARM – The 10/1 ARM has an initial fixed interest rate for the first ten years of the mortgage. After 10 years is up, the rate then adjusts each year for the remainder of the mortgage.
5/5 and 5/1 ARMs – ARMs that have an initial fixed rate for the first five years of the mortgage. After 5 years is up, for the 5/5 ARM, the interest rate changes every 5 years. For the 5/1 ARM, the interest changes every year.
3/3 and 3/1 ARMs – Similar to the 5/5 and 5/1 ARMs, except the initial fixed-rate changes after 3 years. For the 3/3 ARM, the interest rate changes every 3 years and for the 3/1 ARM, it changes every year.
Pros:
Interest rates will likely be low in the beginning.
If you pay the loan off quickly, you could pay a lot less money in interest.
Cons:
Your monthly mortgage payments will fluctuate.
Many borrowers have gotten into financial trouble after taking out an ARM.
Choosing the Right Home Loan
When it comes to choosing a home loan, you need to consider a few key factors. First, you’ll want to think about the type of loan that is best suited to your needs.
Fixed-rate mortgages offer stability and predictability, while adjustable-rate mortgages (ARMs) can be a viable option for those who expect their income to increase significantly over time. You’ll also want to consider your budget and how much you can afford to borrow, as well as the size of your down payment and the length of the loan term.
It’s also crucial to shop around and compare offers from multiple mortgage lenders. While it’s tempting to go with the first lender you find, it pays to do your homework and see what other options are available.
This can help you get a better rate and more favorable terms on your loan. It’s a good idea to get quotes from at least three different lenders, and to consider both traditional banks and online lenders.
Tips for Getting the Best Rates and Terms
One of the most effective strategies is to improve your credit score. Lenders look closely at credit scores when deciding whether to approve a loan. Those with higher scores are typically offered better terms. You can improve your credit score by paying your bills on time, reducing your debt, and correcting any errors on your credit report.
Another tip is to make a larger down payment, which can help you secure a lower interest rate and reduce the size of your monthly payments. Finally, consider working with a mortgage broker, who can help you shop around and find the best deal.
Bottom Line
As you can see, there are many home loans for you to choose from. The type of mortgage that’s best for you will depend on your current income and financial situation.
If you’re not sure where to start, consider working with a qualified loan officer. They can assess your situation and recommend the option that will be best for you.
If you’ve served in the military and need a mortgage, then a VA loan might be right for you, whether you’re buying a home or refinancing. Here’s what to know.
What is a VA home loan?
A VA loan is a mortgage guaranteed by the U.S. Department of Veterans Affairs and issued by a private lender, such as a bank, credit union or mortgage company. A VA loan can make it easier to buy a home because it typically doesn’t require a down payment.
Only qualified U.S. veterans, active-duty military personnel and some surviving spouses are eligible for VA loans. The 1944 GI Bill of Rights established the VA home loan program to help veterans get a foothold in civilian life after World War II.
You might find it helpful to go with a lender and a real estate agent who have experience working with VA borrowers. The home will be subject to a VA appraisal, and an experienced agent will help you avoid homes that won’t meet the minimum required standards.
How does a VA home loan work?
The VA’s guarantee means the government will repay the lender a portion of a VA loan if the borrower doesn’t make payments. This assurance reduces the risk for lenders, which makes it possible for them to offer favorable terms and require no down payment.
VA loan rates are typically lower than offers you’d find for conventional loans. The rate could be fixed, meaning payments will remain the same, or adjustable, meaning that payments could change over time. Adjustable-rate mortgages (ARMs) come with some risk, as you’ll pay more if rates rise.
If eligible, you can complete the VA mortgage application process through a lender of your choice. Many (but not all) lenders offer VA loans, and some lenders specialize in serving VA loan borrowers. It’s a good idea to apply with multiple lenders in order to compare rate offers.
Mortgage loans from our partners
VA home loan eligibility
You’re an active-duty military member or veteran who meets length-of-service requirements (90 days of service during wartime or 181 days of service during peacetime).
You served in the National Guard or Reserve for at least six years, or served 90 days (with at least 30 of them being consecutive) in active duty under Title 32 orders.
You’re the surviving spouse of a service member who died while on active duty or from a service-connected disability and you have not remarried. Surviving spouses can retain eligibility if they remarried after the age of 57 and after Dec. 16, 2003. Spouses of prisoners of war or service members missing in action are also eligible.
You meet the lender’s requirements for credit and income. The VA doesn’t set a minimum credit score for VA loans, but lenders can set their own minimum standards. The lender will also consider your income and debts to evaluate your ability to repay the mortgage.
The property you want to buy meets safety standards and building codes and will be your primary residence. Borrowers are typically required to occupy the residence within 60 days, though this may be extended to 12 months under certain circumstances.
How to apply for a VA home loan
Obtain a certificate of eligibility: A VA certificate of eligibility shows a mortgage lender that your military service meets the requirements for a VA loan. A VA-approved lender can obtain the document for you, which is needed before the loan can close. You can also request the certificate from the VA online or by mail.
Find the right lender: Some VA lenders consider borrowers with lower credit, while others offer a larger variety of VA loan types. Get preapproved with more than one VA mortgage lender to compare their qualification requirements and mortgage rates. Preapproval is nonbinding, but it will give you an idea of what kind of mortgage you qualify for and how much you may be eligible to borrow. Getting preapproved also shows sellers that you are motivated to buy and can qualify for a mortgage.
Find a home: An experienced real estate agent can help you find a home that meets minimum property requirements regarding cleanliness, safety and structural soundness. After you work with your agent to make an offer, the mortgage lender will evaluate your finances and order a VA appraisal to make sure the home meets all the requirements. If your application and appraisal are approved, the final steps are to close on the loan and move into the house. The application process will be essentially the same as when you applied for preapproval, except now you’ll be applying with a specific property in mind.
Pros and cons of VA home loans
Like any type of loan, VA loans have their advantages and disadvantages. Borrowers who may benefit from a VA loan will have to contend with specific fees and eligibility requirements in exchange for features like low rates and no minimum down payment requirements.
Pros
No down payment or mortgage insurance required. Other loan types require down payments and can include an extra cost for mortgage insurance. FHA loans require mortgage insurance regardless of the down payment amount, and conventional loans usually require mortgage insurance if the down payment is less than 20%.
Lower rates. VA loans usually have lower rates than conventional mortgages.
Limited closing costs.Closing costs are the various fees and expenses you pay to get a mortgage. The Department of Veterans Affairs limits the lender’s origination fee to no more than 1% of the loan amount and prohibits lenders from charging some other closing costs.
VA loans can be assumed. This means that when you’re ready to sell your home, you have the option of allowing the buyer to take over your existing mortgage. This can be a selling point if your rate is lower than the current average mortgage rate.
Cons
VA loan funding fee. Although VA loans don’t require mortgage insurance, they come with an extra cost called a funding fee. The fee is set by the federal government and covers the cost of foreclosing if a borrower defaults. As of April 7, 2023, the fee ranges from 1.25% to 3.3% of the loan, depending on your down payment and whether it’s your first VA loan. You can pay the fee upfront or fold it into the loan.
Purchase loans are only for primary homes. You can’t use a VA loan to buy an investment property or a vacation home.
Not all properties are eligible. A VA-approved appraiser will evaluate the home you want to buy to estimate the value and make sure it meets minimum property requirements. Some fixer-uppers may not meet the VA’s minimum standards.
What is the VA loan limit?
The VA loan limit is the maximum amount you can borrow without having to make a down payment. In 2020, limits were eliminated for current members of the military and veterans who have access to their full VA loan entitlement. However, loan limits still apply to borrowers who already have a VA loan or have defaulted on a VA loan.
In 2024, the standard VA loan limit is $766,550 for a single-family home in a typical U.S. county, but it can run as high as $1,149,825 in high-cost areas. It’s possible to get a VA loan even if the home price exceeds the county limit, but you’ll be required to make a down payment. You can use NerdWallet’s search tool below to find the loan limit for your county.
Refinancing a VA home loan
You can refinance an existing VA loan with a standard (also called a “streamline”) refinance loan. This is formally called a VA Interest Rate Reduction Refinance Loan (VA IRRRL). Just as it sounds, the intention behind these loans is to change the rate of your VA loan, either by qualifying for a lower rate or by switching from an adjustable rate to a fixed rate.
Borrowers who want to access some of their equity or who want to convert their conventional mortgage to a VA loan may be interested in a VA cash-out refinance. This would involve taking on a larger loan, paying off your original mortgage, and pocketing the difference. It’s typically recommended that you use this extracted equity to finance wealth-building expenses, like renovations or repairs to the home.
Types of VA home loans
The VA loan program offers a variety of options, including purchase and refinance mortgages, rehab and renovation loans and the Native American Direct Loan. Here’s an overview.
How many times can you use a VA home loan?
Getting a VA loan isn’t a one-time deal. After using a VA mortgage to purchase a home, you can get another VA loan if:
You sell the house and pay off the VA loan.
You sell the house, and a qualified veteran buyer agrees to assume the VA loan.
You repay the VA loan in full and keep the house. Just once, you can get another VA loan to purchase an additional home as your primary residence.
Mortgage loans from our partners
Frequently asked questions
What is a VA loan and how does it work?
A VA home loan is backed by the Department of Veterans Affairs, and it offers competitive interest rates with no minimum down payment. They’re offered by lenders such as banks, credit unions and mortgage companies to borrowers who meet the VA’s qualifications. These criteria include length-of-service requirements (with separate requirements for surviving spouses) and minimum standards for property. The lender will also have its own financial requirements, such as a minimum credit score and a maximum amount of existing debts.
How much does a VA loan let you borrow?
The maximum amount that you can borrow with a VA loan comes down to how much your lender is willing to approve. However, there is a ceiling for how much you can borrow with a 0% down payment if you already have an active VA loan or if you defaulted on a VA loan in the past. This figure is $766,550 in most areas and $1,149,825 in high-cost areas.
What is the minimum credit score for a VA loan?
There is no minimum credit score required by the Department of Veterans Affairs. However, individual lenders will have their own qualifying criteria. Borrowers with credit scores of 620 or higher will have an easier time getting approved.
Does retail sales experience translate to real estate? If the success of today’s guest, Landon Stone, is any indication, it certainly can! Landon’s team doubled their business in a market that’s down 40 percent. And his first year in the business, he closed 33 deals. Listen and learn how to start your real estate career with strong sales and how to scale your success with a team. Landon and Shelby also discuss FSBOs, expired listings, high-value clients, and more.
Listen to today’s show and learn:
Landon Stone’s transition from retail to real estate [2:19]
Landon on selling his first flip [6:03]
Why Landon decided to become a real estate agent [7:31]
How Landon closed 33 homes his first year in real estate [9:32]
The one goal to focus on when calling cold leads [13:28]
From FSBOs to expired listings [17:39]
How to get referrals and the conversations to have with cold leads [19:27]
Why Landon Stone almost quit real estate after a successful start [22:22]
Advice on starting a real estate team [26:37]
What Landon’s real estate team looks like now [28:27]
Winning business in a down market [33:00]
Determining your average ticket and increasing it [36:41]
Where to find high-value clients [38:16]
Resources for doing deals [41:06]
Landon’s advice for real estate agents [43:44]
Landon’s plans for growing his real estate business [49:36]
Where to find and follow Landon Stone [52:23]
Landon Stone
Landon Stone is BORO Realty Group’s CEO, Founder, & Team Leader! He’s driven & passionate about helping those around him make all the right moves! Landon, born and raised in Texas, relocated to the Greensboro, NC area after graduating from Texas Tech University. With a history of working in sales, the ambition of an entrepreneur, and a dream of designing a life to be proud of, Landon found himself starting his career in Real Estate. His mission is to advise his clients at a high level of expertise with a goal to help all of his clients build and maintain long-term wealth. As a General Contractor and Real Estate Investor, he adds an additional dimension of value being able to help clients make design and rehab decisions based on the value it brings to their properties. He strives to impress, push boundaries and help those around him grow into the people they desire.
Related Links and Resources:
It might go without saying, but I’m going to say it anyway: We really value listeners like you. We’re constantly working to improve the show, so why not leave us a review? If you love the content and can’t stand the thought of missing the nuggets our Rockstar guests share every week, please subscribe; it’ll get you instant access to our latest episodes and is the best way to support your favorite real estate podcast. Have questions? Suggestions? Want to say hi? Shoot me a message via Twitter, Instagram, Facebook, or Email.
Biggerpockets’ David Greene joins us on today’s podcast to discuss his latest book, Pillars of Wealth. Hear how to make, save, and invest your money in order to hit financial freedom faster. David shares several insights on building wealth, including why incompetence could be holding you back from success. David and Shelby also discuss inflation, the current state of the economy, and the way winners think. Don’t miss it!
Listen to today’s show and learn:
About David Greene and Pillars of Wealth [2:25]
A helpful tip for increasing motivation [7:45]
Why it doesn’t take super smarts to be financially savvy [10:25]
How David Greene got into real estate [11:24]
How incompetence is holding you back from success [13:28]
David Greene’s DISC profile [15:38]
How to get better at social media and being social [16:38]
Why defense matters when it comes to getting rich [18:42]
The first step to becoming wealthy [21:06]
Tracking your real estate marketing budget and net earnings [23:07]
David Greene’s thoughts on inflation and the economy [25:26]
Preparing for a major recession [29:07]
Building skills in order to build wealth [31:13]
What leadership is and why leaders make more money [33:24]
How winners think [35:19]
Giving your best and getting excellence in return [36:53]
Why most real estate agents aren’t what the market wants [41:55]
Hacks for getting more energy to get more done [48:08]
The easy button: deceptive information on success [49:56]
The good news [54:06]
Applying your work-out work ethic to work [54:30]
Where to find and follow David Greene [55:77]
David Greene
David Greene is a real estate broker and and co-host of the BiggerPockets Real estate podcast. The author of best selling books “Long Distance Real Estate Investing”, “Buy, Rehab, Rent, Refinance, Repeat”, and “Sold: Every Real Estate Agents Guide to Building a Profitable Business”, David is a nationally recognized authority on real estate, and has been featured on CNN, Forbes, and HGTV as well as over 25 different real estate podcasts. A licensed real estate broker and lender, David runs “The David Greene Team”, a top producing real estate company in Keller Williams where he has won multiple awards for production. An active real estate investor, David owns properties of various asset classes across the country.
Related Links and Resources:
It might go without saying, but I’m going to say it anyway: We really value listeners like you. We’re constantly working to improve the show, so why not leave us a review? If you love the content and can’t stand the thought of missing the nuggets our Rockstar guests share every week, please subscribe; it’ll get you instant access to our latest episodes and is the best way to support your favorite real estate podcast. Have questions? Suggestions? Want to say hi? Shoot me a message via Twitter, Instagram, Facebook, or Email.
A higher resale value of your home is one of the many rewards for carrying out home improvements and renovations. But remodeling projects cost money, and financing them can be expensive, depending on the amount you borrow and the type of loan you use.
Options for home improvement financing include home equity loans (HELOCs), home equity lines of credit, and cash-out refinancing. These types of financing allow homeowners to borrow against the equity they have built up in their home. Other financing options are personal loans, credit card financing, and government programs. Any of these could be the best option depending on the circumstances.
Here’s what homeowners need to know about the different types of home improvement loans and what factors they should consider before settling on a lender.
1. Home Equity Loans
If you have built up equity in your home, which means you have paid off a portion of your mortgage, a home equity loan could be the right choice to finance home improvements. To find out how much equity you have, subtract the balance due on your mortgage from the assessed value of your home. For example, if your home is worth $400,000 and you owe $200,000 on your mortgage, you have $200,000 in equity. A bank will let you borrow up to a certain percentage of that amount — up to 100% in some cases.
A home equity loan acts like an additional mortgage, where the homeowner pays back the loan in monthly payments. The payments are in addition to the original mortgage payments. Home equity loans often have low fixed interest rates because the home is used as collateral for the loan. However, there are closing costs to consider that could be between 2% to 5% of the loan amount.
On the plus side, home equity loans usually qualify for the mortgage interest tax deduction as long as the funds are used to substantially improve the home.
If you have plenty of equity and need a sizable amount to finance a big project, a home equity loan could make sense. You will receive a lump sum payment, and the improvements you make may increase the value of your home.
Advantages of a Home Equity Loan
Disadvantages of a Home Equity Loan
Low interest and terms from five to 30 years
There are origination fees and closing costs
You can borrow up to 100% of your home’s equity
Funds are disbursed as one lump sum, so borrowers need to budget carefully
The interest is tax deductible
The monthly payments add to existing mortgage payments
💡 Quick Tip: Before choosing a personal loan, ask about the lender’s fees: origination, prepayment, late fees, etc. One question can save you many dollars.
2. Home Equity Line of Credit (HELOC)
A home equity line of credit also borrows against the equity you have built up in your home. But the funding works more like a credit card and is not distributed as a lump sum payment. A bank will allow a qualified homeowner to borrow up to a preapproved limit and then pay it back. HELOC loan terms are typically between five and 20 years.
Interest rates differ for HELOCs because they are adjustable and rise and fall over the life of the loan. However, interest is only due on the outstanding balance — the amount borrowed — not the full credit limit.
The amount you can borrow through a HELOC depends on your credit score, income, and the value of your home. Your lender can change the loan terms, too. For example, if your credit score drops during the loan term, your lender may reduce the amount you can borrow.
One advantage of a HELOC is that you can use funds from the line of credit, make payments, and then borrow again. A HELOC is a better option if you have smaller projects to do over a longer term. You can borrow as you go, only pay interest on how much you use, and avoid paying closing costs.
Advantages of a HELOC
Disadvantages of a HELOC
No closing costs
Interest rates may go up and down
Interest payments are tax deductible
Interest rates are typically higher than those for a home equity loan
You only pay interest on the amount you use
Your lender can change the amount you can borrow and the repayment terms
3. Cash-Out Refinancing
Another option to fund home improvements is cash-out refinancing. In the case of cash-out refinancing, a homeowner takes out a new mortgage that is higher than their original mortgage. The borrower then pays off the original mortgage and uses the leftover cash to fund home improvements. The amount of cash they can access depends on the equity they have in the home.
For example, let’s say the homeowner currently owes $100,000 on a $300,000 mortgage. They take out a new mortgage for $350,000, pay off the old mortgage ($300,000), and now have $50,000 left to spend on home improvements. The catch is that their new monthly mortgage payments will be higher because they have increased the size of the loan, and they will have to pay origination fees and closing costs.
Money from refinancing does not have to be used to improve a home; it can be used to consolidate debt, pay for school, or anything else the borrower wants to use it for. Also, the cash is not considered income from the IRS and is not taxable.
Cash-out refinancing may be a good option if interest rates have dropped since you took out your original mortgage. You can take out cash and pay a lower interest rate on the new loan. You might also be able to reduce the term length of your original mortgage and pay off your home loan sooner. This will be the case if the total cost of your new loan including closing costs is less than the total cost of your original mortgage.
Advantages of Cash-Out Refinancing
Disadvantages of Cash-Out Refinancing
You will still have one monthly mortgage payment
Your new mortgage will have a higher balance
You might be able to lower your interest rate and loan term
Your loan term will start from the beginning, so you will be paying off your mortgage for longer
You can use the cash for anything
If interest rates have gone up, your monthly payments may be higher
4. FHA 203(k) Rehab Loan
An FHA 203(k) rehab loan is a loan taken out at the time of the home’s purchase. These loans are typically used for a fixer-upper, when the owners need funding right away for improvements. This could be the best type of loan for home improvements for big projects. The advantages of this type of loan for the borrower are that they have funds available for improvements from the outset, and they only have to pay back one loan with one set of closing costs.
These loans are also backed by the government and come with benefits. Borrowers can qualify with a less-than-stellar credit score (typically, a minimum of 620), and the down payment expected is lower than it would be for a traditional mortgage loan (as low as 3.5%).
Two things to remember are that the renovation costs must exceed $5,000 for the borrower to qualify for this type of loan, and the closing process can take a long time. Lastly, work covered under an FHA 203(k) loan must start within 30 days of closing, and projects must be completed within six months.
This type of loan may be worth considering if you are buying a fixer-upper that requires significant work, and your credit score qualifies you for this type of loan.
Advantages of a FHA 203(k) Rehab Loan
Disadvantages of a FHA 203(k) Rehab Loan
One loan and one set of closing costs
Only old homes or homes in bad repair may qualify
Federally-backed with low interest rates and low closing costs
You are likely to be charged costly monthly mortgage insurance
You can qualify with a lower credit score
Cash must be used for specific home improvements
5. Personal Loans
If you don’t have sufficient equity in your home to take out a home equity loan or a HELOC, a personal loan is an option. A personal loan will come with a higher interest rate, adjustable or fixed, because this type of personal loan is unsecured. Your home is not used as collateral. These loans are processed much quicker than home equity loans or HELOCs, sometimes the same day.
Personal loan terms are shorter, from two to five years, which will mean higher monthly payments, and you’ll have to pay closing costs.
These loans may work if you lack equity or if you have an emergency, such as a broken water heater or HVAC system. That said, they are probably one of the most expensive borrowing options.
Advantages of a Personal Loan
Disadvantages of a Personal Loan
Fast financing
Higher interest rate than mortgage loans
You can qualify for a good interest rate even with an average credit score
Shorter terms, which increases monthly payments
Your home is not used as collateral and is not at risk
Fees and possible prepayment penalties
6. Credit Cards
A credit card can be used for financing, and it’s a fast, simple way to access funds. The amount you can spend on improvements will depend on your credit limit (although you could use multiple cards), and the interest charges are likely to be much higher than other financing options.
A credit card can be a good option if you think you can finish your renovations quickly and pay off the balance on the card. Look for cards with an introductory 0% annual percentage rate (APR). Some cards allow you up to 18 months to pay back the balance at that introductory rate. If you can pay off the balance by the deadline, that’s interest-free financing. However, check for fees and other hidden costs.
The danger here is that if you don’t pay off the balance by the end of the interest-free rate, the interest charges can skyrocket. That’s why credit cards should not be used for long-term financing.
A credit card can be a great option for home improvement financing if you can find one with a low introductory rate, low fees, and you are confident you can pay off the balance within the introductory rate period.
Advantages of Credit Card Financing
Disadvantages of Credit Card Financing
Fast financing
High interest rates, particularly after a low introductory interest rate period has expired
Some cards offer 0% introductory rates
Possibly low credit limits
Less paperwork
High fees
7. Government Assistance Programs
The federal government has grants and programs that can help homeowners pay for renovations. Two home renovation loan options are Title I loans and Energy Efficient Mortgages. Lenders for Title I property improvement loans for your state are listed on the U.S. Department of Housing and Urban Development’s website.
Title I Loans
An FHA Title 1 loan is a fixed-rate loan used for home improvements and rehabilitation. Loans under $7,500 are usually unsecured, but bigger loans may use your home as collateral. These loans may be used in conjunction with a 203(k) rehabilitation mortgage.
The maximum loan terms are between 12 and 20 years, and loan amounts are $7,500 to $60,000, depending on the home’s size and type.
The loan must be used for property improvements, and an FHA mortgage insurance premium of 1% of the loan amount will be added to your interest rate. There is no minimum credit score required, but your debt-to-income ratio may factor into your loan terms.
Energy Efficient Mortgage
FHA’s Energy Efficient Mortgage program (EEM) finances energy-efficient improvements with their FHA-insured mortgage. The borrower must qualify for the loan amount used to purchase or refinance a home. However, they’re not required to be qualified on the total loan amount that includes the amount used to finance energy-efficient improvements. The FHA insures the loan to protect the lender against loss in the event of payment default.
Starting in 2023, homeowners can also get tax credits for some energy-efficient updates, including windows, insulation, new doors, heat pumps, and air conditioners.
These types of programs will reduce the cost of financing for home improvements and are great options if you meet the criteria.
Advantages of Government-Assisted Financing
Disadvantages of Government-Assisted Financing
Low interest rates
Financing must be used for property improvements.
Broad range of loan terms
Strict qualification standards
Tax credits
Larger loans may require your home as collateral.
How to Decide the Best Type of Home Improvement Loan for You
If you’re trying to decide what home improvement loan is best for you, consider the following factors:
Are You Purchasing a Fixer-Upper?
If you are buying a fixer-upper, check if you qualify for either an FHA 203(k) rehab loan or a government-assisted program. You may get cheaper financing this way.
Do You Need Funds Right Away?
If you need funds quickly — for example, you have a broken heat pump or HVAC system — a personal loan or credit card financing are options to explore.
Do You Have Equity Available?
If you have built up equity, a home equity loan or line of credit will provide cheaper financing than a personal loan and over a longer term, so that your monthly payments will be lower. A cash-out refinancing loan might also mean that you could lower your payments and reduce your term if interest rates have dropped significantly since you took out your original mortgage.
How to Get a Home Equity Loan
The first step in getting a home equity loan is to decide which loan is best for your situation. Next, find a lender with the best terms and fill out an application to see if you qualify.
1. Check Your Financial Health
The better your credit score, the better the loan terms will be. If you can boost your credit score before you apply for financing, you’ll boost your chances of getting a better deal. Lenders will also look at your debt-to-income ratio when setting the interest rate and term, so lowering your debt before you apply for a home improvement loan can help lower the cost of your financing.
2. Compare Lenders
You should contact a few different lenders to compare their rates and loan terms. Look for benefits, such as rate discounts for enrolling in autopay, and watchouts, such as late payment fees and minimum loan amounts.
3. Gather Documentation
You will need to submit a few basic pieces of information when you apply for a loan. As a general guide, you will need:
• Proof of income, such as W-2s or 1099s, bank statements, pay stubs, or tax returns.
• Proof of residence, such as your Social Security number and utility bills.
Your current debts, housing payment, and total income will also play a role. Be sure to have all the information your lender may need on hand when you apply to speed up the application process.
💡 Quick Tip: With home renovations, surprises are inevitable. Look for a home improvement loan with no fees required — and no surprises.
4. Apply for Prequalification
Some lenders will prequalify you, which will tell you your interest rate and how much your monthly payments will be. Prequalification should not affect your credit score, whereas a formal loan application could. Applying for too many loans in a short space of time could lower your credit score.
5. Complete the Loan Application Process
Your loan application might be fully online, via phone and email, or in person at a local branch. In cases where you are borrowing against equity, your lender may require a home appraisal. Provided your finances are in good shape, the lender should approve your application, and you’ll receive funding.
How Your Credit Affects Your Home Improvement Loans
Your credit score will affect the total cost of a home improvement loan. The higher your score, the less of a risk you pose to a lender, so the better the loan terms will likely be for a mortgage or long-term loan. The same goes for credit cards and personal loans. Also, if you have good credit, you’ll probably have an easier time securing a home improvement loan.
Can You Use Home Equity Loans for Non-Home Expenses?
Home equity loans and HELOCs are flexible and can be used for anything, not just home expenses or renovations. However, these loans are best suited for long-term, ongoing expenses like home renovations, medical bills, or college tuition.
The Takeaway
The types of loans for home improvements include loans based on the equity you have built up in your home, such as a home equity loan, a HELOC, or cash-out refinancing. You can also use personal loans, credit card financing, and government programs. Loans based on equity tend to cost less over the loan’s lifetime, but they also tend to have longer loan terms. Equity-based loans also tend to be best when you need to borrow a larger amount, because you can spread out the cost over a longer period.
A personal loan will have a higher interest rate and a shorter term, but the higher your credit rating, the better the interest rate tends to be. Alternatively, credit card financing is favorable if you need funds quickly, the amount you need is not too high, and you can take advantage of a 0% introductory rate and pay off the balance before the rate expires.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.
SoFi’s Personal Loan was named NerdWallet’s 2023 winner for Best Online Personal Loan overall.
FAQ
What type of loan is best for home improvements?
The type of loan that is best for home improvements depends on your finances and how much you need to spend. If you hold a fair amount of equity and need a sizable amount of cash, a home equity loan, HELOC, or cash-out refinancing may be good options. Cash-out refinancing might be particularly appealing if interest rates have dropped, and you can refinance with better loan terms.
If, on the other hand, you have a smaller project that you expect to complete in a short timeframe, using a credit card that gives a 0% interest rate for a period could be the way to go.
What is the best renovation loan?
If you’re taking on a big project, buying a fixer-upper or planning to renovate an older home, you may want to consider the FHA 203(k) mortgage. The 203(k) rehab loan lets you consolidate the home and renovation costs into a single remodel home loan and avoid paying double closing costs and interest rates.
If your home is newer or higher-value and you have equity, cash-out refinancing can be a good option, particularly if interest rates have dropped.
Should I use a personal loan for home improvements?
Personal loans are a more expensive option for home improvements, especially if your credit score is average. However, using a personal loan for home improvements might be the best option if you don’t have a lot of equity to borrow from.
Are home improvements tax deductible?
Home improvement loans are generally not tax deductible. However, if you use a refinance or home equity loan, some of the costs might be tax deductible. Check with a CPA or tax specialist.
What credit score is needed to get a home improvement loan?
Credit score requirements for a home equity loan depend on the lender. A credit score in the mid-600s might be enough to be approved by some lenders, while others might not approve you with a score above 700. Lenders consider many factors, including your debt-to-income ratio and equity in the home, when considering you for a home equity loan.
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With record-low inventory nationwide, real estate agents seem to be hearing the same thing day in and day out: “I’d list my home, but where would I move?”For most agents, that’s the end of the conversation, ending the possibility of taking a new listing as well as facilitating the buyer side. Nationwide, inventory is at all-time lows. According to Altos Research, this week there are only 465,000 active listings. We are still at least a million listings shy of being a balanced market, so this excuse is not going to subside anytime soon.
Stop answering clients’ concerns by saying, “Yeah, there’s really nothing on the market, I mean everything in the MLS is already pending.I’ll put you into my search widget and we’ll watch for something to pop up together.”
While that’s onemethod of finding a home for your would-be sellers to buy, you can’t end the conversation there and expect to do any business this year. The key is to set up the ‘drip system,’ then move the conversation forward by being a problem solver. How does someone list and buy at the same time successfully in a market like this?
Here are 10 solutions for sellers who what to buy that go beyond waiting and watching for magic inventory to appear.
Build a home instead of chasing after the scarce resale inventory
30% of available homes are new construction, so there are several advantages to this option. First, many builders are buying down interest rates using their in-house financing. Builders are closing loans in the 4.5 to 5.5% range currently! Next, the house is new. No rehab for them and no inspection woes for you. Your client can get their home on the market a few months before construction is complete and not have to move twice. Finally, when your client builds, they don’t have to compete in a bidding war.
Buy first, close and then list the previous home
Don’t assume your clients won’t or can’t utilize this option. They may have a downpayment saved that isn’t their home equity. They might use a bridge loan to borrow their equity, close on the next home and then sell the old one. You don’t know if you don’t ask. The advantage here is that your client can make a non-contingent offer, secure their next home and deal with their old house later. Make sure you know lenders who offer bridge loans and understand how to explain this option.
Sell first, rent for a while and take the time to look for the right home
The advantage here is the seller has cashed out their equity and is ready to pounce on the right home, but without the pressure of scheduling closing and possession dates. Who are your go-to leasing agents? Maybe youare a leasing agent. Consider both traditional rentals, short-term vacation rentals, as well as apartment complexes. Many have some great amenities which could work for a short to longer-term lease while you help your client find the right home to buy.
Offer acceptance contingent on seller finding suitable housing
The buyer will probably want a specific time frame, but you can usually get 90 to 120 days to secure the next home. Many buyers in today’s market are simply anxious to find the right home, so they will be flexible with the seller’s situation. It’s still a seller’s market. The advantage to your client is they won’t have to move twice and you’ve built in enough time to look for the next place.
Convert the previous home into a rental
You can handle the lease yourself or refer it to your favorite leasing agent. The home stays an asset for your client and they can keep their low-interest rate mortgage. Don’t assume that this isn’t an option. You have to ask! Remember that Americans currently have record-high credit scores. They may be more comfortable taking this option than you think. In some markets, keeping the home and turning it into a short-term rental can be very profitable. It might be the best option for your client. You can always run the numbers and see if it makes sense, at least in the short term.
Leasing back the home
In this scenario, the buyer is happy because they secured the house, and your seller is happy because they have both time and money coming in to facilitate their move to the next place. Once the home has been purchased by the new owners, your clients would essentially pay rent to stay while they house hunt.
Buying an RV, a houseboat or a sailboat
There are endless examples of sellers who cashed out their homes, bought a recreational home and traveled for a while. You might be surprised that it’s not just baby boomers or retirees who are doing this! Another version of this option involves sellers cashing out and renting a series of short-term rentals in different areas of the country or the world, trying out new possibilities before they decide where to land.
Find your would-be seller an off-market home to purchase where that seller has flexibility
In this scenario, you are in complete control of both sides of the transaction, and you may pick up yet another client when the off-market seller also needs to buy. Refer to our podcast series and HousingWire articles about how to find inventory that’s not in the MLS.
Moving into an assisted living care facility
Many of the homes that are coming onto the market right now are in 55 and over communities. There is also inventory from families downsizing, new empty-nesters moving and the like. Are you prospecting in those neighborhoods?
Moving in with relatives
Whether that’s moving in with parents, kids or cousins somewhere else, it can be a short-term solution for sellers who don’t have another property in mind yet.
Bottom line? You can’t just wait around for listings to appear for your sellers! Stop relying on your ‘drip system.’ Be proactive with different solutions that could work for them. You’ll have more transactions and they’ll value your expertise, netting you both current business as well as future repeat and referrals.
Tim and Julie Harris host the nation’s #1 podcast for real estate professionals. https://timandjulieharris.com/category/podcast has new podcasts every day. Tim and Julie have been real estate coaches for more than two decades, coaching the top agents in the country through different types of markets. https://PremierCoaching.com to get started for FREE today.