Home renovations are all the rage these days. Homeowners took to home renovations as they spent more time at home because of COVID-19.
You might have big dreams of a home renovation. You can finally create that home office and open kitchen that you have dreamed of for years.
You’ll soon learn that there’s quite a sticker shock that comes along with the home renovation. On the low-end of the spectrum, a home renovation.
Unless you have that kind of cash available, you’ll need to get financial help. Personal loans are one way to finance home renovation.
Read on to learn how to get a personal loan for your home improvement venture.
Table of Contents
1. Decide on a Budget
What’s your home renovation project? Are you going to renovate the entire house or just one room?
The most difficult thing to know is how much you should spend on your renovation. A good guideline is to decide what your renovation is and calculate the square footage that you’ll renovate.
Calculate the percentage of square footage compared to the rest of your home. For example, if your home is 2000 square feet and you want to renovate 500 square feet, that’s 25%.
Then learn what the value of your home is. Keep in mind that in this real estate market, your home’s value is slightly inflated.
Multiply your home’s value by the percentage of space to renovate. That’s how much you should spend on the renovation.
If your home is worth $200,000 and you’re renovating 25%, your home renovation should be around $50,000.
2. Get Estimates
You want to confirm with contractors that you can complete the home renovation within your budget.
This is a good time to determine who your contractor is and how much your renovation costs.
Get recommendations from friends and family members. Check out the home improvement contractors online.
Note the portfolio of projects, online reviews, and testimonials. You should also look up their contractor license numbers to make sure they don’t have negative reports against them.
You should contact 3-5 contractors and invite them to your home for an estimate. The estimates should be transparent, with line items for labor, materials, contingency, and everything else.
You should find that the estimates are comparable. Be wary of estimates that are too low and too high.
3. Check Your Credit
You can move forward with getting a personal loan for the home renovation. Start with checking your credit score.
Lenders look very closely at your credit score to determine if you’re a credit risk or not. They’re not going to lend $45,000 if you can’t handle credit cards and other forms of debt.
The average credit score. If your credit score falls in that range, you’re in good shape. You’re likely to get approved with a favorable interest rate.
The minimum credit score you need to have is 670. Anything less than that, and you’re looking at a personal loan for bad credit. These loans have high-interest rates and fees. However, there are still some lenders who are not only offering bad credit loans but also providing an accompanying guarantee.
If you’re hovering close to 670, there are a few things you can do. The first is to pay down your credit cards. This lowers your credit utilization rate, which has a sizeable impact on your credit score.
If you see mistakes on your credit report, get those fixed as soon as possible. Mistakes are common, and they can influence your score.
Do you have old late payments on your credit report? You might have gone through a rough period several years ago, but those late and missed payments stay on your credit report.
It’s worth a call to your credit card company to get those late payments removed. Companies are willing to do so if you show a consistent history of on-time payments.
4. Understand the Types of Personal Loans
Before you start looking for lenders, you need to understand what is a personal loan and the types of personal loans available.
A personal loan is a form of credit where a lender gives you a lump sum of money. Those funds are used for any purpose. You can use them for vacations, home renovations, debt consolidation, or even starting a business.
The loan is paid back in installments, meaning the principal and interest are combined into one monthly payment.
The terms of the loan state what the interest rate is and how long you have to repay the loan.
There are two types of personal loans. Most are unsecured loans. These are loans that you pay back but aren’t backed or guaranteed by property or assets.
If you default on an unsecured loan, you’ll go to collections and have negative marks on your credit report for several years.
A secured personal loan indicates that the loan is guaranteed by personal property. You use collateral like a savings account, home, or other forms of property.
The amount of risk for the bank is minimized, and you’re rewarded with a lower interest rate. The risk that you take is that if you default on the loan, the lender can seize the collateral.
5. Evaluate Lenders
Personal loan lenders will pre-qualify first. This is the best way to evaluate a loan because it doesn’t impact your credit score.
Don’t be seduced by a loan with low monthly payments. It’s often because the length of the loan is longer. You may have a loan for 15 years with low payments.
Unless you plan to stay in your home for that long, that may not be the best financial advice.
You want to compare the monthly payments, interest rates, and length of the loan. Dig a little deeper and compare loan fees, such as pre-payment and administrative fees.
In the meantime, you’ll want to gather financial documentation to make the application process efficient.
You’ll need your most recent pay stubs to prove your income. Depending on the lender, you may need a couple of recent tax returns.
If you don’t have pay stubs, have your most recent tax returns and bank statements. Lenders want to make sure you make enough to repay the loan.
You’ll also need copies of your ID (driver’s license or passport) and proof of address.
6. Fill Out the Loan Application
You only want to fill out a loan application with one lender. Lenders pull your credit report, which lowers your score by a few points.
If you apply for several loans at once, lenders think that you’re in financial trouble and won’t approve the loan.
The application process is relatively straightforward. Many lenders let you apply for a personal loan online, so you don’t need to visit a bank.
You’ll fill out your name, address, employer, income, assets, and liabilities. You have to be honest when you fill out the information.
Don’t conveniently forget about your student loan to make your financial picture look better. It’s fraud and they’ll discover that information on your credit report.
7. Get Approved and Get to Work
The great thing about personal loans is that they get approved quickly. It’s not like a mortgage where it takes weeks to get approved.
Unsecured loans get approved within a few days. It might take a week at the longest.
Secured loans take longer because the lender has to assess and approve the value of your collateral.
You give the lender your banking information on the application. Once the loan is approved, the money gets deposited into your account within a couple of days.
You can proceed with your home renovation. This is the time to secure the contractor. Get clear on how much you need to pay the contractor to start work.
Don’t work with a contractor that demands 100% to begin. You’re just inviting major issues to ruin the home renovation.
Contactors require a percentage to start, then additional payments at certain benchmarks. Make sure you understand this before you sign the contract.
At the end of the project, you get to enjoy your home and show off your home improvement project.
Personal Loans for Home Renovations
Home renovations are expensive. They cost tens of thousands of dollars, but the end result is often worth it.
You can turn to personal loans to turn your home into your dream home. There’s a lot to learn about personal loans, and this guide walked you through the steps from your budget to approval. With a little planning, you’ll find that the approval process is simple.
Be sure to follow the steps outlined here, and you’ll have a loan that fits your needs and your budget.
For more financial news and resources, check out the home page of this site.
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