If you don't have a lot of personal savings, then you will need to get financed for your home renovation. The problem with finding a lender is that you often don't qualify for the amount that you need or you simply don't qualify at all. If you have exhausted all other types of funding, then you will have to find a lender who can help you. Banks are not the only ones who can offer a loan. You can try a variety of financing options before trying to take out a second mortgage. There are some things that you need in order to qualify for a loan.
Start From the Beginning
You want to know the numbers before you try to get financed. This means that you need to start with a firm bid from a contractor, then break down that bid into labor and materials. Add on 10 percent for anything that may come up during the project. If you are planning to do work yourself, then you should create a list with materials, quantities, costs, and an accurate total. Include permit fees and equipment rental. A cushion of about 20 percent is also necessary. When you have figured out a total, this is your number that you need to get in order to start your project.
Your Credit Rating
Every lender will check your credit history. The best rates are going to go to homeowners with an A rating. That means you don't have any late payments in the last 12 months and you also don't have any maxed credit cards. If you have one or two late payments, as well as an overdrawn card, as long as you are trying to get current, you should be able to get a loan, but you will have a higher interest rate. If you have worse credit than this, it's unlikely that you will be approved for a loan through a bank or you will receive an extremely high interest rate for a second mortgage on your home.
Getting qualified also means understanding how lenders will qualify you for a certain amount. Loan-to-value ratios are used to calculate a maximum amount that can be offered to you. The loan-to-value ratio is the percentage of your appraisal value on your home. The usual limit for any homeowner is 80 percent. So if your home is worth $200,000, you can expect to get $160,000 maximum. Lenders will subtract the mortgage balance from that amount to arrive at the maximum amount you can borrow. So, if you have a balance of $90,000 on your home, then you can expect to be offered $70,000 for your home renovation.
Lenders will also consider your income. There are two main factors in deciding what you will be offered based on your income and mortgage payments. Although if you have high expenses, high income level might also mean a lower loan payment, because it shows that you already have a lot to pay for each month currently.
If your house payment and other debts are below 36 percent of your gross monthly income, you are in good position to get approved.
Your house payment alone which includes the principal, interest, taxes and insurance, should come to no more than 28 percent of your gross monthly income. The maximum debt-to-income ratio rises to 42 percent on second mortgages, although some lenders may go higher.
The less interest rate that you have, the more loan you can afford. An adjustable-rate mortgage (ARM) is one way to lower the rate on a house renovation finance payment. However, because lenders aren't locked into a fixed rate for up to 30 years, ARMs will start off with much lower rates, gradually increasing. You have to be wary that you can afford the interest rate that you are given in a few years as well as 10 years from now if you have a higher loan amount.