Home Improvement Loans and Bad Credit

A home improvement loan is similar to a home equity loan/line of credit, except that the loan proceeds are used specifically for making capital improvements to your home. See Home Equity Loans and Lines of Credit. Home improvement loans are secured loans. When you take out a home improvement loan, you use the equity in your home as collateral. You can typically apply for a loan that is equal to, or slightly higher than, the value of the equity in your home. The lender typically receives a mortgage to secure the loan.

Home improvement loans are available at most savings and loan associations, mortgage banks, and commercial banks. Interest rates and terms may vary considerably from lender to lender.

Typically, interest rates are adjustable, but some fixed rates are available. We recommend that you talk to several lenders, compare interest rates, and certainly ask about obtaining a fixed rate.

To ge a loan, you will have to complete an application.

Bad Credit? FHA home improvement loans (discussed earlier) may be available to you even if you have poor credit and no equity in your home. You may be able to borrow as much as $25,000 to make improvements on your home. This is a big help for homeowners who have credit problems or have seen the market value of their real estate plunge below their mortgage balance. These borrowers would probably not qualify for a home equity loan or second mortgage.

Rapid Funding? Under the FHA home improvement loan program (discussed previously) funding can be obtained within 7 to 10 days. A second mortgage or home equity line could take 30 to 45 days. This could make a big difference to you if your home improvement loan is funding repair of a leaking roof or septic system.

What if you don't have any equity? You may be able to get a home improvement loan even if you do not have any equity in your home. The Federal Housing Authority (FHA), a federally sponsored agency, manages a government insured home improvement loan program. No appraisal is required, and you can borrow under the FHA program whether or not you have any equity. Other benefits of the plan include fixed interest rates, up to 20-year terms and quick funding (7 to 10 days). Ask your lender about FHA Title 1 Home Improvement Loans. Typically, the bank will require an appraisal of your home to determine the value of your equity. Most lenders will loan you more than the value of the equity in your home on the assumption that the capital improvements will increase the value of your home.

Tax Deductible? Interest on home improvement loans secured by your primary or secondary residence is generally deductible as long as the total of all mortgage and home improvement loans secured by your primary or secondary residences does not exceed $1 million ($500,000 if you are married and filing a separate return).

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