Home Improvement Loans: How to Find Quick Cash to Renovate Your House

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Home improvement loans sound pretty sweet: Imagine, someone actually gives you money to fix up your house! And these loans are actually plentiful if you know where to look. Here are some options to explore, and how to tell whether they’re right for you.

FHA 203(k) loan

The FHA 203(k) loan is a loan from the Federal Housing Administration—so that means you can put as little as 3.5% down! Homeowners can use the money to redo a kitchen or bathroom, finish a basement or attic, change out the floors, buy appliances, or add a room.

The loan can even be used to rebuild a tear-down as long as the original foundation remains, explains Suzanne Caldeira, a finance expert at Shamrock Financial Corp. The only no-nos are upgrades that are deemed “luxury” items, like adding a pool or fire pit.

How it works: To qualify for a 203(k) loan, homeowners have to provide a bid from an approved contractor to make the upgrades they want with their loan paperwork. An appraiser reviews the home and the submitted bid, and appraises the estimated value of the home postrenovation. That appraisal must be in line with local comps—if it’s not, you could be required to scale back the reno you’re proposing.

Once the loan is approved, the money for the renovation is put into escrow. After the work is completed—the deadline is six months—an inspector visits to determine that it’s been done correctly, then the money is released to the contractor.

Like traditional FHA loans, you can pay it back over 15 or 30 years. Although the interest rate can be fixed or adjustable, you can expect to pay a rate that’s about 1% higher than a standard loan, as well as private mortgage insurance for the life of the loan.

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Fannie Mae HomeStyle loan

The HomeStyle loan is similar to the 203(k) loan, but it requires at least a 5% down payment. Another difference: There’s no limit to the kinds of renovations you can do, as long as everything is permanently affixed to the home and adds value.

How it works: As with the 203(k) loan, you have to hire an approved contractor and submit a bid for the project with your loan paperwork. You then have an appraiser determine what your home will be worth after the renovations. Once you’ve got that number, you can borrow up to 50% of that appraised value to do the renovation.

Similar to a 203(k) loan, the money for the renovation is held in escrow until the work is completed and inspected and is then released to the contractor. However, with the HomeStyle loan you get 12 months to complete the renovation instead of six. You then pay it back over a period of 15 to 30 years at either a fixed or adjustable rate. As with any loan, you must pay PMI if you put down less than 20%.

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Section 504 Home Repair Program

This government initiative helps qualified homeowners improve their homes, but not in a “I’m dying for a new backsplash” way. Rather, the renovations must make your home safer (e.g., replacing dangerous electrical components), more energy-efficient (e.g., repairing the insulation, furnace, or ducts), or more accessible to the elderly or people with disabilities (e.g., adding ramps and bars).

To qualify for a Section 504 loan, you have to have a household income below 50% of the area’s median, and be unable to obtain affordable credit elsewhere. There’s also a grant program for people over the age of 62 to add accessibility features, which is ideal for homeowners aging in place.

How it works: The maximum loan amount is $20,000, which can be repaid over 20 years with the interest rate fixed at 1%. You apply for the loan, then after determining that you are indeed eligible, a loan officer comes to your home to figure out which repairs would qualify. After that, you get at least three bids from approved contractors. The loan originator signs off on the contractor and the work, and you can get started with the improvement. Here’s more on Section 504 home loans.

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