Home Improvement

January 30, 2019 By: Chris Fuller

Whether you are sprucing up the home you live in or looking for a new one, you are likely thinking about a home loan. The process sounds complicated, but knowing some helpful tips will make it easier. Just follow these steps.

10 Easy Steps to get a Home Improvement Loan

Get a free copy of your credit report.

First, you need to understand your FICO score. This is a special credit score that lenders use to decide if you are eligible to borrow money. Although there are other kinds of credit scores, most lenders rely on the FICO.

A low FICO score can affect your ability to rent an apartment, get a loan, get approved for a credit card or even get a job. A high FICO score will not only increase your chances of getting a loan, but it will also mean that you will get lower interest rates.

You can get a free copy of your credit rating once a year from the three main credit reporting companies: Equifax, Experian and Transunion. You can also track your credit with an online app called Credit Karma.

Make sure your credit report is accurate.

A 2012 report by the Federal Trade Commission found that over 20 percent of all credit reports contained “confirmed material errors.” Because mistakes make it harder for you to get credit, it is important to make sure that your report is accurate. If you find a mistake on reports by Experian, Transunion or Equifax, you can file a dispute at myFICO.

If you mail a letter, send it by certified mail and request a receipt so that you can document when it reached the credit bureau. After you file a dispute, contact the company that reported the error and tell them you are disputing the charge with the credit bureau. Keep copies of all documents. Some states allow you to get a free report from the appropriate bureau after you file the dispute.

Raise your score before you apply for a loan.

A few points can determine whether you get a loan and what interest rate you will pay. Use these tips to lower your score:

• Pay your bills on time. Late payments that you made recently count more against your credit score than older ones. The ratio of credit to the card limit accounts for 30 percent of your score.
• Set up automatic payments or reminders to avoid late payments. One late payment can reduce your score by up to 75 points. FICO data says that a payment 30 days late could cause a FICO score to fall by 90 to 110 points for a consumer with a score of 780, even when it’s the first late payment.
• Don’t apply for new credit cards or open new accounts. If you get a car loan or a new credit card before you apply for a home loan, the credit check could leave a hard inquiry on your credit report. This will lower your score by around five points.

Get pre-approved for a home loan.

Before you make plans to buy or remodel a home, make sure you are eligible for the credit you need. To do this, a lender will check your credit, employment history, income, and assets. In the real estate market, sellers like to sell to buyers with a pre-approved loan. Usually, the pre-approval lasts from 60 to 90 days. You will need to provide the following documents: tax returns and W-2 forms for the past two years, pay statements for 30 days, bank account statements for 60 days, and signed authorization for the credit report.

Before pre-approval, you will go through a pre-qualification process to give you an idea of what you can afford and what kinds of loans you can get. This is done for your own information and does not mean you are pre-approved for a loan.

Look at your savings.

Getting a home loan involves more than just getting a loan. You will need money for a down payment and closing costs, usually from 2 to 5 percent that bankers charge to make the loan.

The down payment is the money you pay the lender at closing. The amount varies, but a down payment of less than 20 percent means that you will have to pay for mortgage insurance to protect the lender. If you fail to pay the mortgage and lose the home, the mortgage insurance will reimburse the lender for their losses. Mortgage insurance is expensive, but you can usually drop it after you have 20 percent equity in your home. If you make a higher down payment, you can often avoid mortgage insurance and qualify for a bigger loan at the same time.

The money you use for a down payment can come from your own savings, profits from a house you are selling or money you were given by family, employers or nonprofits.

Use online calculators to see what you can afford.

Now that you know what your FICO score and savings are, it’s time to figure out how much you can afford. You will need to consider the following: your household income, your monthly debt such as the car or student loans, and the amount of your down payment. Financial advisors recommend setting aside enough money to make house payments and usual expenses for three months as a cushion against unexpected events.

You can use online calculators to determine your ratio of savings versus the cost of a home, but you could also look at other types of loans. If you don’t have 20 percent for a down payment, you might consider an FHA loan that requires a minimum of 3.5 percent for a down payment. Veterans can even qualify for a VA loan with no money, and non-military residents may be eligible for a no-money-down mortgage or home improvement with a USDA loan. The most common is known as the Rural Home Mortgage. What you can afford may depend on the type of loan.

Look for assistance with your down payment.

Consumers, especially first-time buyers, sometimes qualify for grants or other help with down payments. The U.S. Department of Housing and Urban Development, for example, works with local nonprofits and governmental agencies to provide financial help and guidance. You can find information about your area through federal, state and local websites.

You can find out online if you are eligible for down payment assistance, the kind of home you can buy and the kinds of programs that are available. Programs vary in different geographic regions, and people in some professions qualify for special help. Search by city, county and federal resources.

Research different kinds of home loans.

To find the best fit for your needs, learn all you can about the different kinds of mortgage programs and home loans available to you. Much of the choice depends on your budget, credit scores, income, and priorities. Some people splurge on homes or renovating while others prefer to budget more for travel or other expenses.

Here are six types of home loans:

• A fixed-rate loan is the most common. A fixed-rate loan adheres to the same interest rate and monthly payment until it is paid, usually for a period of 15 or 30 years. This kind of loan works well for consumers who are staying in one place and want assurance their payments will not change.
• An adjustable-rate mortgage, or ARM, usually starts with a lower interest rate. ARM loans may have a lower interest rate for 5 or 10 years before it changes. After that, the rates and payments will change about once a year. At that time, they will go up or down depending on the current rate. If the interest rate goes down, the payments go down. If interest rates go up, the payments go up. This works for buyers with lower credit scores or for people who plan to sell their homes within 5 to 10 years.
• An FHA loan has a lower down payment. A fixed-rate loan requires a 20 percent down payment, but the down payment for an FHA loan starts at 3.5 percent. While FHA loans have less flexibility and more restrictions, they allow buyers with low incomes to get mortgages. Lenders must also pay mortgage insurance.
• A VA loan provides loans to the military with no down payment. Anyone who serves in the U.S. military can qualify for a VA loan with no down payment and no mortgage insurance. Veterans must serve in the military for 90 consecutive days during wartime, 180 days during peacetime or six years as a member of the reserves. The VA does not approve loans for fixer-upper homes, however, and the house must be a permanent residence.
• A USDA loan is geared to families in rural areas. A USDA loan provides a discounted interest rate with no down payment for families who otherwise could not afford a home. Borrowers cannot borrow more than 41 percent of their income, and they must buy mortgage insurance.
• A bridge loan fills the gap between selling and buying a home. A bridge loan provides borrowers with funds to buy a new home while selling their old home. Lenders then add the current mortgage to the new one in a single payment. When the home sells, the homeowner pays off the bridge loan and refinances. It is good for consumers with excellent credit who only need to finance 80 percent or less of the value of both homes.

Choose the right loan.

A 30-year mortgage is more common and older than the newer 15-year loan, but 15-year loans end up costing half as much by the time interest is paid. It, however, has a higher monthly payment than a 30-year mortgage. The unpaid balance shrinks more slowly over the life of the longer loan.

The terms of the loan also matter. An adjustable-rate mortgage is usually easier to qualify for and costs less for the first few years while a fixed-rate mortgage will stay the same and not go up.

Find the best mortgage lenders.

Unless you refinance or pay it off early, you will live with the terms of your mortgage for a long time. For the best experience, choose your lender carefully. Choosing a lender for a home improvement loan or home mortgage may be confusing. You can find someone who is registered through the Nationwide Multistate Licensing System Registry in your state and search for reviews with the Better Business Bureau. You’ll be able to choose between these types of lenders:

• Banks and mortgage bankers get their money from their customers and investors. They offer checking, investment options and loans.
• Credit unions are like banks in many ways, but they have members who own them. Customers must be members to get loans. Like banks, they offer several services in one spot.
• Mortgage lenders are bankers in many ways, but they fund loans in their own name. Their only purpose is making loans for real estate, and most sell their loans to servicing companies or banks. Most do their own underwriting, processing and closing with their in-house staff, shortening the waiting time for a loan.
• Mortgage brokers work as liaisons between homeowners and bankers rather than making direct loans. However, they have access to many loan programs, and lenders and can search for unique home loans not offered elsewhere. Consumers who have unique needs or interests may consider mortgage brokers.

The right loan can save your sanity and your budget regardles

Chris Fuller

Chris Fuller went to the University of South Florida and has worked in the financial sector for over 20 years. He has extensive experience in all aspects of personal and small business lending, from personal loans, equipment finance to cash flow based solutions for small mom and pop businesses, and large corporations.