Financing Your New Home Renovation

You no longer have to go to the bank to get a loan for a new kitchen, bath or deck. There are ways to get financing that didn't exist before. You can contact a mortgage broker who can offer you 100 more ways to get a loan. Brokers are actually only one of the many lenders who are eager to put together that fits your needs and supplies all you need for a home remodel project. You may be worried about a bad credit history or the cost is too high, but there are some really excellent loan programs available for homeowners right now. You will need to have some information ready before you get financing, but here's a walkthrough of everything that you'll need for financing your house renovation.

1. Put together a budget.

You need to know how much money it will roughly cost. This means adding up the square footage of your home, finding material costs and talking to a contractor, if you plan on hiring a contractor. You also will need to add in cost of appliances, furniture, paint, flooring or any other items that you are going to be adding to your home remodel. This will give you a rough estimate of how much you need once you subtract what you can pay out-of-pocket.

2. Narrow down your loan options to ones that will work for you.

There will be a variety of loan programs available. You should pick a loan with a lower interest rate and with an institution that you have trusted. You can talk to your contractor about finding a good financing center or even home improvement experts at places like Home Depot. If you have thought of taking a second mortgage on your home, you may be able to talk to your lending institution to get a lower rate than other places if you have made timely payments on your home for an extended period of time. You should find lenders that are eager to negotiate and work with you.

3. How much can you borrow?

This number is going to depend greatly on your credit history. You also need to know the loan-to-value ratio and your income. These are all factors in determining what you will receive to help finance your home remodel. These factors will also decide the interest rate on the loan, as well as the length of the loan and if you have to pay points. If you have decent credit, you will likely get a good rate. The best rates and terms go to homeowners with an A rating, which means no late payments in the last 12 months and no maxed out credit cards. One or two late payments and overdrawn credit cards will probably not look as bad as something that is in collections. However, that will mean a higher interest rate with a smaller loan.

4. What is a loan-to-value ratio?

The loan-to-value ratio means that in determining the loan amount, lenders will consider the loan-to-value ratio, the percentage of the appraisal value of your home. The limit is about 80 percent or $100,000 for a $125,000 home. Lenders will subtract the mortgage balance from that amount and surmise a maximum available amount that you can borrow. If you have a balance of $60,000, you could borrow about $40,000 according to these rules.

5. How much does income matter?

If you have a lot of expenses and a little income, with no savings, it's going to be hard for you to get a loan. There are some things that lenders do consider when looking at your income. Your house payment and other debt should be below 36 percent of your gross monthly income. Your house payment alone, which includes the principal interest, taxes and insurance, should be no more than 28 percent of your gross monthly income.

In truth, you won't really know your situation unless you can look your credit report and find no instances of question regarding any previous debts. If you have no credit history but you have a provable income, then you can likely get a good rate on a loan and start earning some credit in the process. You should also think about doing renovations that will give you a return on your investment, such as a family room addition. These will give you a leg up if you decide to sell your home in the future.

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