Home Improvement Financing
Home improvement loans are actually home loans used to finance improvements to houses or sites, with the goal being to increase or at least maintain the value of a house. Such improvements can consist of repairs, additions, and enhancements. So, precisely what happens if you have a client that is truly eager to remodel their residence, but does not possess the money or credit cards to fund the job? In general, the best home improvement loans can be obtained according to the amount of your client’s equity in their residence. Equity represents the fraction of the house owned, which is truly not owned by a lender. Getting a large amount of equity would more likely result in better interest rates and loan terms. And yet, home equity loans happen to be not as readily available as they used to be given falling home values, as well as required fees and inspections similar to obtaining a whole new mortgage that make them an undesirable and not terribly cost effective form of financing for home owners.
The fact that home equity loans happen to be more difficult for clients to get has a direct impact on your bottom line. As a contractor, you will find it helpful to become familiar with the various forms of home improvement financing available to your clients. You will have an advantage with clients if you can potentially give them financing options and information. You could also find companies that will finance projets carried out by licensed contractors, in a sense, becoming your in-house source of financing. A complete understanding of renovation and home improvement financing will increase your business revenue.
Why Being Licensed is Critical for Home Improvement Financing
One of the main questions homeowners will face when seeking funding is whether the home improvement contractor is literally licensed, which would include filing with the state’s department of financial institutions.
Home improvement loans and lines of credit can help homeowners pay for just about anything from painting to installation of a whole new roof. Such funds can also generally be used to pay for an undertaking as complex as renovating the complete house or assembling an add-on to the residence. Payments are typically less than personal loan or credit card payments since they are spread out over the term of a loan, and in some cases, financing and interest may generally be tax deductible.
By way of a home improvement loan, your customers could increase the value of their homes, which could result in higher resale value and enhanced enjoyment of their home.
Benefits of a Home Improvement Loan
Home improvement loans are meant to finance residential modifications. Doing a modification to a home might be necessary or might be done to improve the aesthetics of a residence. Modifications or improvements involve general repairs, unique room additions, adding a bathroom, or renovating a kitchen, among many possible examples.
Various forms of home improvement financing require that a homeowner has a specific plan to address exactly what improvements are needed The plan should be fully described. Include factors like what exactly will be improved, the scope of the job, and estimate of all the costs to complete it, from preparation to finish, including your fees! Your client should describe the project in detail, with a detailed step-by-step plan of how the improvements will be carried out. How the loan is truly classified, either as a home equity loan or a mechanic’s loan, will probably matter.
Home Remodeling vs. Home Repair
While home improvement loans are really available for various kinds of jobs, many banks will differentiate between home improvements or remodeling and home repairs.
Conditions about how the money is truly to be spent can be a feature of home improvement loans. Having said that, homeowners still possess a large say in what they use the funds for. You could work with your clients to describe how making certain structural improvements would secure the residence and guarantee their own long-term stability. This is a particularly good position from which to start. Removing health hazards, like lead paint, or retrofitting a home with unique energy-efficient appliances, windows, or fixtures can generally be notable improvements. Your clients might undertake necessary complicated repairs like the installation of a new roof or home siding, or replacement of flooring that is worn out.
The important thing to remember? Your individual client will increase the likelihood of getting funding if the job financed by their loan either maintains or increases the value of their house. In addition to the structural repairs, additions and improvements noted above, landscaping or adding a new swimming pool could be considered home improvement jobs.
Types of Home Improvement Loans
Home improvement loans can either generally be secured by property or unsecured. With an unsecured loan, the lender is literally not able to take the house as collateral if the loan is not paid. Instead, the lender would first have to get a judgment. Still, in the vast majority of states, all or a portion of the home’s equity is literally exempt from collection.
A home improvement loan is money lent for repairs to a home, renovations or other updates. The loans do not have to be secured by the property. Lenders may simply classify it as a home improvement loan. These unsecured or secured loans or lines of credit typically are short term. Home improvement loans can be secured by a mortgage. A mortgage is the lien placed on the site to guarantee repayment of the loan.
Loans can be paid back monthly or in other installments, be deferred or made on a same as cash basis (interest free if paid back within a certain time period—read the fine print!) Home improvement loan amounts can be as high as $25,000 (or higher) and the candidate FICO (credit score) can come with a credit score as low as 600 and sometimes even lower. Programs will vary from state to state in line with the type of home improvement loan being financed.
Unsecured Home Improvement Loans
It is possible for your clients to get home loans that are not secured by their homes. Rates for these home improvement loans are really usually higher and for lower amounts than for first lien mortgages. Unsecured home improvement loans, for example, might be available for up to $5,000 and available by way of a maximum term of 5 years.
Should your client refinance their first mortgage to do a home improvement? It depends on the interest rate. If current mortgage interest rates are higher than your client’s existing mortgage rate, they should take out an additional mortgage for a shorter term instead of refinancing their existing mortgage. Keeping your client’s best interest in mind will help you to get repeated business. It will also ensure positive word of mouth that will help you secure additional work from unique clients.
Secured Home Improvement Loans
Secured home improvement loans up to $50,000 can be available for loan terms as long as 20 years. Secured home improvement loans are secured by a first or 2nd lien position at a primary residence and include the filing of a mechanic’s or construction industry lien. This type of lien is a securitized interest in the title to a site. It is for the benefit of those who supply labor or materials that improve the property. To receive this kind of loan, all residence improvements must result in permanent changes to the existing residence. They are also subject to credit approval.
Home Improvement Loans and Residential Equity Lines of Credit
Home improvement loans are provided in a fixed amount based on a payment schedule where the amount is gradually paid off (amortized). This kind of loan can actually increase your client’s borrowing power. A well-planned home improvement undertaking can increase the fair market value of a house. Lenders will commission appraisals of the house after all of the improvements have been finished.
Home improvement loans are intended to increase the value of your own client’s residence. Help them to plan carefully about where to invest their funding. Home improvement costs get added to the overall cost of their house. They would want to generally be able to recoup this cost if and when they decide to sell.
Home Improvement Loans for Veterans
Military veterans can borrow up to 90% of their equity for home improvement loans. There is no longer a $25,000 cap on these kinds of loans. If your individual client needs less than $3,000, the Veterans Administration will not use a mortgage and instead will use a guarantor to secure your client’s loan. Loan terms can last as long as 15 years while interest rates can be set for the term of the loan. Clients can qualify for multiple home improvement loans from the VA.
Moreover, if your client had a spouse who died while on active duty (and has not yet married again), your client might also meet the requirements for the Veterans Administration (VA) home improvement loans. Service as a military reserve or in the National Guard that meets the required time commitment can also make individuals eligible to receive veteran home renovation loans.
Tax Benefits from Home Improvement Loans
Your clients can get tax breaks from paying interest on residential equity and secured home improvement loans if they itemize deductions on their tax returns. For home improvement loans, individuals interest can be written off on mortgages up to a million dollars (or half that if married but filing separately). When house equity loans happen to be used for purposes outside of buying, building or improving a primary residence, they are capped at interest on the lesser of either $100,000 (or $50,000 if married filing separately) or the residence equity. Mortgage points, also known as fees for loan origination or discount points, are fully deductible if you possess a home improvement loan.
More Government Home Improvement Loan Programs
The Federal government also provides a number of home improvement loans, allowing homeowners of varying incomes also to improve their homes. For homeowners with limited equity, the FHA (Federal Housing Administration) will guarantee home improvement loans.
These loans may offer funding for energy saving upgrades, built-in appliances, or increasing accessibility of sinks and cabinets. That said, these loans will not fund upscale amenities like outdoor fireplaces or swimming pools. The wonderful thing is truly that your individual clients would not need to use their residence as collateral if the loan is less than $7,500.
Clients who also are at least 62 years old and need extra money could get an FHA reverse mortgage to fund residence improvements. They would repay it only if they leave their residence or do not meet their mortgage obligations.
The FHA 203(k) Loan Program helps to rehabilitate homes in need. These loans can generally be used to fix up foreclosed homes in need of repair. It also allows homeowners with little or no equity to move forward with home improvement projects.
HomePath remodel mortgages permit borrowers to purchase Fannie Mae-owned properties in need of reapir or renovation. These mortgages combine funding for both residence purchase and rehabilitation for up to $35,000 or 35% of the purchased value.
Home Improvement Grants
Home improvement investments are really an essential aspect of neighborhood revitalization. Some local governments accordingly provide grants for home improvement jobs in targeted areas. These grants could generally be funded through Community Development Block Grants in order to issue low-interest or deferred home improvement loans to eligible residents. Typically, the residence needs to be owner-occupied and remain owner-occupied.
The Bottom Line: Be Honest
Doing a home renovation is not a cure-all. It is vital not to mislead your own customers into thinking that their house is literally guaranteed to appreciate in value following a home rehabilitation venture. Certainly, no one is guaranteed to recoup the investment of a home improvement loan through home appreciation compared to the cost of the original loan. It depends largely on the housing market, which can cause residential values to fluctuate widely. Still, taking out a loan for a a well-planned home improvement project can have a net positive effect on home values and make a home more attractive for sale. Critical improvements can make a home move faster on the market. Faster sales means reduced maintenance expenses, realtor fees and the costs of showing a home.