Any home improvement project can be costly, and this may require the ability to access funds via financing in order to get it completed. In order to help you with the process, below is a Q&A that outlines what you should know about the process, and how Northface Construction can help!
Why should I finance my roof?
A roofing project can be quite expensive, even if you’re not using premium materials like metal. You can count on spending $3.50 to $5.00 per square foot. With an average roof size of 1,700 square feet, this can put a middle of the road cost at $6,000-$8,500 for the project. If you can’t afford to put this kind of cash up front, then financing makes sense.
How can I finance my home improvement project?
There are many different ways to finance a home improvement project. The most common options are personal loans, home equity loans, home equity lines of credit (HELOC), FHA loans, mortgage refinancing, and credit cards.
What types of home improvement projects can be financed?
For most financing you can use the funds for any project you like. The only exceptions are FHA loans, which only allow normal additions and renovations, and not luxury additions such as swimming pools or landscaping.
The Financing Process
Where can I apply for financing?
You can apply for personal loans online, and be notified of potential offers the same day. You need to visit your local bank to apply for home equity loans and HELOCs. Most refinancing happens at the bank, however there are online brokers who allow accept applications on the web. You can apply for FHA loans through an approved lender or a mortgage broker.
How long will it take to get approved for financing?
You can apply for a personal loan today and have it approved within 24 hours for use on your home improvement project. Credit cards can be immediate depending on the amount of credit that is available. Bank and government administered loans will require an application process that may take weeks or months to process.
How much equity do I need in order to be approved?
It depends on the kind of financing that you choose. For a personal loan of $35,000 or less, you won’t need any home equity. Credit card financing requires no home equity as well. If you use a home equity loan or home equity line of credit, then you will need a loan to value ratio of less than 80%.
What kind of credit do I need to get a loan?
You can qualify for a personal loan with a credit score as low as 580. The best rates for personal loans are given to applicants with credit scores above 640. FHA loans will require a score of 500+. Home equity loans and HELOCs are more dependent on debt to income ratios (usually 45% or less to qualify) than credit scores, because your home equity is pledged as collateral. If you’re trying to get money from a refinance, then you’ll typically need a debt to income ratio of 36% or less.
What are typical loan terms?
Typical loan terms will depend on the kind of financing that you get. Here is a list of the different loan types and their typical loan length:
- Credit Cards: Open ended. You will pay for the financed amount until all the interest and principal is paid off. Introductory offers of 0% interest can vary between 12 and 24 months, before reverting to a standard interest rate
- Personal Loans: 3-7 years
- FHA Loans: 15-30 years
- Home Equity Loans: 20-30 years
- Home Equity Lines of Credit: 15-30 years
- Mortgage Refinance: 15-30 years
What kinds of fees are attached to the loan?
For a Personal Loan, there is an origination fee in the range of 1-5%. With an FHA loan there may be a variety of costs, including a down payment of at least 3.5% of purchase price, an upfront mortgage insurance cost of 1.75%, monthly mortgage insurance premiums, and any closing costs from the lender or broker. Home equity loans and HELOCs require closing costs, a home appraisal (~$300-$500), and sometimes annual credit fees. Refinances are similar to home equity loans in that they have closing costs (~$2000), a home appraisal (~$300-$500), and various origination fees (~$200-$800 per item).
What kind of interest rates should I expect on financing?
Interest rates are largely determined by your credit score and the prevailing market conditions. As of 2018, the average personal loan has an interest rate of 10-20%. A refinanced mortgage would get 3-5% for 15-30 year terms. A home equity loan or HELOC will go for 3-7%, depending on the loan. FHA loans will run between 3-5%. A credit card can offer 0% APR on an introductory offer for 12-24 month period, but after the introductory period you can be paying rates of 15-30% depending on the card.
How much should I ask for?
You should make sure that you have enough total funds to cover your project, along with about 10-15% of cost overruns due to unforeseen issues during the quoting process. How much you ask for in the loan application will depend upon how much of your own cash you want to contribute to the project on top of the loan. Make sure to get an exact written quote from your contractor, that details out all expected costs, and can explain the most likely cost overruns.
What sort of financing should I choose for my project?
The kind of financing you choose will depend on many variables, some of the most important to consider will be the size of the project and how quickly you want the available funds. Personal loans and Credit Cards can be good choices for projects that are limited in scope or may need to be done urgently. For repairs or simple upgrades like roofing repair or install, window replacement, or emergency plumbing and electrical work these types of financing are ideal because you can have the funds ready within days. Larger scale home improvements or full scale renovations would be better served by choosing one of the loan options that can release larger amounts of funds such as a home equity loan, HELOC, mortgage refinance, or FHA loan. However larger loans have a longer application process and are not ideal for urgent repairs or tight timelines.
How Northface Can Help You
How soon can you start my project once I’ve been approved?
We can schedule your project as soon as your funds are available. The time it takes to get your funds approved will vary based on the type of financing you choose. FHA loans must begin within a month of receiving funds and finish before six months.
Does Northface Construction offer roof replacement financing?
How much can I borrow on a Personal Loan?
You can borrow up to $35,000 for your home remodel project without using any home equity.
What are the benefits of a Personal Loan?
Personal loans can be applied for and have the funds available quickly (~1-2 weeks from application to funds availability). If you have a good credit score (650+) you can recieve some of the best rates available for that amount of funds (< $35,000). The cost of originating the loan is typically much lower than most loans, as you will normally just need to pay a 2-5% origination fee, as opposed to home equity or mortgage financing, which will require a home appraisal, closing costs, documentation fees, title fees, and any other origination fees the lender has. These financing closing costs can amount to thousands of dollars that you will either have to pay for upfront, or roll into the loan principal. Rates for personal loans are typically fixed over the life of the loan, which means a predictable monthly payment, as opposed to a variable rate which can fluctuate greatly depending on the market conditions.
Personal loans also typically require no home equity to secure the money, so that you can preserve the equity for a larger project or emergencies. New homeowners can renovate right away before they’ve had a chance to build equity.
What are the drawbacks of a Personal Loan?
A personal loan is limited to a $35,000 maximum for use on a home improvement project, so if you need to do a larger budget renovation, it may not be ideal. Typically personal loans have higher interest rates (10%+) than Home Equity or Mortgage Refinancing (3-7%), and the payback term is shorter than those loans as well (3-7 years vs 15-30 years). Personal loans also do not offer tax advantages versus the more conventional home loans, so you can’t write off the interest on your taxes.
Outline of financing options:
There are many important differences between financing options that may affect which one will be right for you. Below is a matrix that shows some of the key differences between them:
|Loan Type||Interest Rates||Common Fees||Term Length||Application||Credit or Equity Required||Best For|
|Personal Loan||10-20%||Origination Fees||3-7 years||1-14 days||640+||Urgent and smaller jobs (<$35K)|
|Credit Card||10-20%||None||Until Paid||0 for existing. 1-3 days for new||Varies based on card applied for||Urgent and small jobs that can be paid within months|
|Home Equity Line of Credit||3-7%, mostly variable||Closing Costs, Transaction Fee||15-30 years||1 month||45% Debt to Income|
80% Loan to Value
|Variable Budget, may need flexibility|
|Home Equity Loan||~5%, fixed||Closing Costs, Home appraisal||20-30 years||1 month||45% Debt to Income|
80% Loan to Value
|Large Project with a fixed budget|
|FHA 203K Loan||~2-5% Fixed or Variable||Down Payment, Origination Fee, Closing Costs, Insurance Fee||15-30 years||1-3 months||500+||Buying and fixing up a home with low money down|
|FHA Title I Loan||~2-5% Fixed||Insurance Fees||12-20 years||1-3 months||500+||Home improvements. Limited available cash or low equity|
|Mortgage Refinance||3-5%, fixed or Variable||Closing costs, Home appraisal, Origination and Documentation fees, etc..||15-30 years||1-2 months||20% Home Equity, 36% Debt to Income ratio, 75% Loan to Value ratio||Large projects|
Getting Prepared for Financing a Home Improvement Project
Below is a summary of the important points detailed previously. Regardless of the type of financing you choose, you should make sure to have clear answers to the following topics before begin looking for financing options:
The timeline or urgency of the project
Emergency roof repairs or sewer breaks are highly urgent and may require funds right away. A personal loan would be a good choice for these tight timelines. However large scale remodels that require planning and time can be better served by traditional home financing or FHA loans even though the application process may take months, as they can help you access greater amounts of funding, longer terms, and lower rates.
The estimated budget for the project
Make sure that you get a good and accurate price for your project before you apply for funds. Shop around your project with multiple contractors and work to get as accurate of an estimate as possible so that you have a sense of what the high and low end of your project costs will be. Once you understand what your budget is and the likely amount of cost overruns, then you will know how much you need to apply for.
Your debt to income ratio
Several types of financing will require that you meet certain debt to income standards in order to qualify for the loan and the best rates available. The lower this ratio is, the more funds and financing options you will have available to you. Having a debt to income ratio under 35% will make most options available. You can tabulate this manually based on outstanding debts and recent payment history, or use a calculator such as this one.
The amount of home equity you have
Your home equity is the value of the home minus the debt you owe on the property. If your home is valued at $300,000 and your remaining mortgage is valued at $250,000 then your equity is $50,000. If you have 20% or more home equity to pledge as collateral, you will have access to funds and financing options that aren’t available without sufficient equity. Personal loans and FHA loans will still be available to you if you can’t get secured financing with home equity as collateral.
Estimated credit score
Your personal credit score, which ranges from 350-850, demonstrates to lenders what your likelihood is of being able to pay back a loan. Lenders will pull this score from one or more of the three major credit agencies (Equifax, Experian, TransUnion) who have compiled your financial history and other financial metrics to build the score. The higher your credit score is, the better the rate will be on a loan, because it indicates a strong financial situation with a low risk of default or missed payments.
Your current employment status
Having a steady income stream is important before taking on new debt. Are you a salaried employee at a stable company, or are you a contract worker whose income may fluctuate frequently? Make sure that you are more than able to take on this recurring bill regardless of how much money is coming in on a monthly basis, and that you have cash reserves if this might fluctuate. Having a good history of income and verifiable employment is also a major checkpoint for lenders before they approve financing for a loan.
Northface Construction is Ready!
If you’re ready to begin a home improvement project today, Northface Construction is ready to assist you by providing a competitive and accurate quote, and helping you get in touch with fast and fair financing. Contact us today for a free estimate!