How To Get a Home Improvement Loan: 5 Steps To Follow

Obtaining financing specifically designed for home renovations, upgrades, or repairs involves steps and processes. Finding the right way to finance a home renovation can be overwhelming, no matter how long you’ve owned your home. 

You might have heard about options like construction or FHA home improvement loans, but did you know there’s an alternative that could make more sense for your project? 

RenoFi loans offer a unique way to finance renovations, and they come with benefits that traditional loan options can’t match.

In this guide, we’ll discuss the different types of loans available, explain how to get a home improvement loan and introduce RenoFi loans, which offer unique benefits. 

5 Steps to Getting a Home Improvement Loan

Here are the steps to take to get the financing you need. 

Step 1: Determine Your Project Scope and Budget

Before you apply for a loan, outline your project in detail. When considering a home improvement loan, you should take the time to gather estimates and understand some key factors. 

• Obtain Accurate Estimates: Get detailed quotes from licensed contractors who can give you a cost breakdown. You should also factor in the cost of the materials and supplies. 
• Feasibility Study: A feasibility study can assess whether your renovation plans are realistic, given your budget, timeline, and the current state of the property. It is also a great way to determine how the renovations will impact your home’s value. 
• Permits: Your permits will also impact the scope of the project and your budget. Depending on the complexity of your renovations, the costs for your permits can start really adding up. Permit fees, hidden costs, and inspection costs should all be at the top of your mind during this step. 

Step 2: Check Your Credit Score

When determining whether to approve your loan and what interest rate to offer, most lenders will consider your credit score. If you have a good credit score, you are likely to qualify for lower interest rates. However, if your score needs improvement, it would be best to take some time to pay down debts or resolve any issues before applying for a loan.

Step 3: Research Loan Options

Once you understand your project and credit profile, it’s time to explore your loan options. Personal, home equity, FHA Title I, and RenoFi loans have different qualification requirements and terms. Therefore, consider the pros and cons of each type of loan about your project’s size, timeline, and financial situation.

Step 4: Compare Lenders and Rates

Different lenders offer different terms. Take the time to compare offers and find the one that suits your needs. Remember to pay attention to interest rates, loan terms, fees, and other conditions. It’s also good to look at the loan’s total cost over time, not just the monthly payment, to ensure it fits within your budget.

Step 5: Apply for the Loan

After choosing the right loan and lender, it’s time to apply. To get started, you must provide information about yourself, your finances, and your renovation project. This includes things like income, tax returns, and details about your home.

The Limitations of Traditional Loans

Traditional loans can be useful but often don’t provide enough funding for larger renovations. For example, a home equity loan or HELOC relies on the current value of your home, which may not offer enough borrowing power for a major renovation.

Also, refinancing your existing mortgage for a cash-out refinance can mean losing a favorable interest rate. This is where RenoFi loans offer a distinct advantage.

Why RenoFi Loans Are a Better Choice

RenoFi loans are designed to solve homeowners’ common challenges when financing large-scale renovations. Instead of basing your borrowing limit on your home’s current value, RenoFi loans use the after-renovation value (ARV). This allows you to borrow significantly more, enabling you to tackle your entire renovation wishlist without compromising on quality or scale. 

• No need to refinance
• No draws or inspections
• Contractor-friendly

How Does a RenoFi Loan Work?

Let’s imagine a scenario where you want to spend $150,000 to renovate your new home and increase the value of your home by $150,000:

Scenario 1 (New Home Purchase): 

• Home price: $600,000
• Downpayment (20%): $120,000
• Current Mortgage Amount: $480,000

Example Home Equity Loan Amount: 

• $600,000 * 80% = $480,000 (80% of Total Home Value)
• $480,000 - $480,000 (Current Mortgage Balance) = $0 (Home Equity Loan Amount)

Example RenoFi Home Equity Loan Amount:

• Assuming that your renovation project will add $150,000 to your home value

• After Renovation Value of Your Home: $750,000

• RenoFi Loan Amount: 

  • $750,000 * 90% = $675,000 (90% of Total Home Value)
  • $675,000 - $480,000 = $195,000 (RenoFi Home Equity Loan Amount)

Using a RenoFi Home Equity Loan you have increased your loan amount from $0 to $195,000. Not only are you now able to borrow the $150,000 you wanted to renovate your home, but you can now borrow up to $195,000 because the RenoFi loan is written against your ARV (After Renovation Value).

Without RenoFi loans, you would not have been able to borrow the $150,000 needed to add the renovations that would increase the value of your home by $150,000. Now, with RenoFi loans, you are now able to get the loan you need to add the renovations you want to your home.

Scenario 2 (Recent Home Purchase): Assuming that you have now paid 10% of your mortgage:

• Home price: $600,000
• Current Mortgage Amount: $420,000

Example Home Equity Loan Amount: 

• Example Home Equity Loan % of Home Price: 80%

• Example Home Equity Loan Amount: 

  • $600,000 * 80% = $480,000 (80% of Total Home Value)
  • $480,000 - $420,000 (Current Mortgage Balance) = $60,000 (Home Equity Loan Amount)

Example RenoFi Home Equity Loan Amount:

• Assuming that your renovation project will add $150,000 to your home value

• After Renovation Value of Your Home: $750,000

• RenoFi Loan Amount: 

  • $750,000 * 90% = $675,000 (90% of Total Home Value)
  • $675,000 - $420,000 = $255,000 (RenoFi Home Equity Loan Amount)

Using a RenoFi Home Equity Loan you have increased your loan amount from $60,000 to $255,000 (4.25x more). Not only are you now able to borrow the $150,000 you wanted to renovate your home, but you can now borrow up to $255,000 because the RenoFi loan is written against your ARV (After Renovation Value). 

Here’s a summary of the difference between traditional and RenoFi home loans in table form: 

In addition to letting you borrow more money for your home renovations, RenoFi loans also offer:

• No draw periods
• No inspections
• No need to give up your original loan
• Higher borrowing limits

RenoFi loans are funded on the day the loan is closed and that is it. Take out the $195k and you get $195k in your bank and you have 20 years to pay off in equal monthly payments with interest and principal, just like a standard mortgage.

Steps to Getting a RenoFi Loan

If you’re interested in a RenoFi loan, it’s pretty easy to apply.

1. Estimate your after-renovation value (ARV)
2. Pre-qualify for a RenoFi Loan
3. Choose a contractor and finalize plans
4. Submit your loan application
5. Receive your funds 

RenoFi loans provide a more innovative way to finance large-scale renovations. With borrowing power based on your home’s future value, you can access more funds without refinancing your existing mortgage. 

Whether planning a major home addition, building an accessory dwelling unit (ADU), or completely remodeling your kitchen, a RenoFi loan gives you the flexibility to finance your project without compromising your financial stability.

What You Need to Know About Home Improvement Loans

A home improvement loan is a type of financing designed to help homeowners fund renovation or repair projects. With a home improvement loan, you get the money immediately and pay it back in regular monthly installments.

There are various home improvement loans, from personal loans to secured options like home equity loans and lines of credit (HELOCs).

Before you start the loan application process we outlined above, it’s essential to understand the different types of home improvement loans. Each one has its own rules and perks.

5 Types of Home Improvement Loans

When it comes to home improvement loans, there are several common options available, including: 

1. RenoFi Loans

RenoFi loans are an innovative type of home renovation financing. Unlike traditional loans that are based on your current home value, RenoFi loans use the after-renovation value (ARV) of your home to determine how much you can borrow. This allows you to borrow significantly more than with other types of loans, which can be especially helpful for large renovation projects.

RenoFi loan products include: RenoFi Home Equity Loans, RenoFi HELOC, and RenoFi Cash Out Refinance

2. Personal Loans

Personal loans are unsecured loans that can be used for almost any purpose, including home improvements. Since they’re not backed by your home, approval largely depends on your credit score and income. 

These loans typically come with higher interest rates compared to secured loans. Therefore, they can be a good option if you don’t have enough home equity to leverage.

3. Home Equity Loans

A home equity loan allows homeowners to borrow against the equity they’ve built in their home. Equity is the difference between the current value of your home and the outstanding mortgage balance. 

With a home equity loan, you get a lump sum of cash upfront and repay it in equal monthly payments over a set term. It’s like a personal loan but with a lower interest rate.

4. Home Equity Line of Credit (HELOC)

A HELOC works similarly to a credit card. You’re approved for a line of credit, which you can draw from as needed. Unlike a home equity loan, a HELOC usually has a variable interest rate; hence, your payments could change over time. HELOCs are ideal for larger projects where you may need access to funds at different stages of the renovation.

5. FHA Title I Loans

If you don’t have much equity in your home, an FHA Title I loan could be a suitable option. These government-backed loans can be used for minor improvements or repairs. Because the Federal Housing Administration insures them, the qualifications for FHA Title I loans may be more lenient, making them a good option for those with lower credit scores.

Conclusion

If you’re considering a home renovation and want a financing solution that works for your specific needs, a RenoFi loan could be the best choice. Unlike traditional options that are limited by your home’s current value, RenoFi loans leverage your home’s after-renovation value. This allows you to borrow more and avoid the pitfalls of refinancing. 

Unlike traditional loans, which are based on your current home value or require you to refinance your primary mortgage and give up your low rate, RenoFi loans are based on the after-renovation value of your home. This allows you to borrow, on average, 11x more, get a low monthly payment, and keep your low rate on your first mortgage.

Learn more about how RenoFi loans can help you realize your renovation dreams. Get started with your RenoFi loan here.