Bad Credit Home Improvement Loans

Home Improvement Loans

Developments of a permanent nature, that add to the value of the property and protect or improve the habitability and the intrinsic utility of the property, are referred to as home improvements. Replacements, repairs and restorations are not classified as improvements unless they enhance the value of the property. Improvements to manufactured homes, single-family homes, multifamily homes and nonresidential structures and work undertaken for the preservation of historic homes qualify for home improvements loans.

People with a good credit score and credit history can avail a Federal Housing Administration (FHA) Title I loan for undertaking home improvements provided their home qualifies for the requisite improvements. FHA insures property improvement loans disbursed by private lenders who are guaranteed up to 90 percent of the value of the loan against risk of default. People with poor credit scores may obtain a bad credit home improvement loan in one of the following ways.

Ways of Obtaining Bad Credit Home Improvement Loans

People, who have a house, can use the built up home equity to obtain a loan for financing the cost of remodeling the home. Of course, the built up home equity, that is defined as the difference between the current market value of the home and the remaining mortgage balance on the home (if any), has to be positive. The built up home equity can help people, even those with a poor credit score, obtain the required sum of money at a rate of interest that is much lower than the rate charged on other types of consumer credit.

Mortgage Refinancing: Mortgage refinancing is the process of replacing the current mortgage on the house with another mortgage loan of the same size having a relatively favorable rate of interest. Although mortgage refinancing is typically used for the purpose of easing mortgage payments, one may replace the current mortgage with a larger mortgage and use the extra cash to finance home improvements. This may be a feasible option for people who have equity on the house but have a poor credit score. In fact, this new secured debt may also be used to consolidate other consumer debts provided the borrower is confident of his/her ability to make regular payments, failing which the home may be seized by the lending institution. Hence, it’s best if refinancing is used for lowering mortgage payments or for getting additional cash for making home improvements.

Home Equity Loan: This is the second option that is available to a home owner with a positive equity on the house. The home owner may use the built up home equity to obtain a home equity loan that requires fixed monthly payments of interest and principal. This loan is suitable for a borrower who is confident about his/her ability to make regular payments or who feels that the rate of interest is likely to increase in future. The latter makes it favorable to avail a fixed rate loan since the rate of interest will not fluctuate with the prime rate. Of course, a borrower with a good credit score will find it easier to avail a low fixed rate loan as compared to a borrower with a poor credit score. The latter is most likely to be straddled with a fixed rate loan with a high rate of interest.

Home Equity Line of Credit: This was an option for a sub-prime borrower before the housing crisis. The borrower could easily use the equity on the home and borrow a line of credit that had a revolving structure. The revolving structure ensured that the borrower had to make only interest payments on the amount that was borrowed during the draw period while paying the principal during the repayment period that could stretch to 30 years or so. Both home equity loans and home equity lines of credit may allow the borrower to deduct interest payments before paying taxes. The housing crisis has resulted in a number of lending institutions freezing their lines of credit. Hence, this option may no longer be available to the borrower. One may refer to the article Home Equity Loans Vs Lines of Credit for further details.

Having a co-signer who agrees to assume responsibility for the repayment of the loan may help a borrower avail a home improvement loan at a reasonable rate of interest. Ultimately improving credit scores is imperative to ensure that one can avail loans at a reasonable rate of interest.