Home Improvement Lender

A home improvement lender markets a variety of products for homeowners who want to finance projects that will either maintain or increase the value of their properties. Perhaps the house needs certain repairs or upgraded plumbing or electrical work. The homeowner may want to upgrade an outdated kitchen or bathroom. Or perhaps a young couple wants to build an addition to accommodate a growing family. These are all legitimate reasons for seeking financing by applying for a loan through an appropriate financial institution. This may be a mortgage broker, a bank, a credit union, or even an online lending company. Many lenders encourage property owners to apply for these types of loans even if the funds will not be used for home improvement projects. Some borrowers use these kinds of loans to consolidate other types of debt, to make major purchases (such as a vehicle or boat), to invest, or for any other personal reason. Though there may be occasions when taking out a loan for these types of reasons is necessary, it usually is not a good idea because the borrower's home is collateral for the loan. If the money is not repaid, the home improvement lender might foreclose on the property and the borrower could lose the house.

Prospective borrowers are advised to do some homework before applying for a loan. A good first step before completing an application with a home improvement lender is to get a copy of one's credit report and FICO score. Federal law allows consumers to receive one free annual credit report from each of the three major credit reporting bureaus, namely, Equifax, Experian, and TranUnion. There will probably be a small fee for the FICO score, but it is worth paying for this information before applying for a loan. The prospective borrower can review the information on his credit file for accuracy. If there are mistakes, the borrower will need to have these corrected. If the FICO score is in the poor range, the consumer will want to take steps to improve it before completing an application. This is important because interest rates often depend on the applicant's creditworthiness. The higher the score, the lower the interest rate will probably be. Usually, the best interest rates and loan terms go to the applicants with higher scores. The home improvement lender is going to take a very close look at the applicant's credit report and FICO score before approving a loan. Knowing the information ahead of time, and fixing any glitches, will increase the likelihood of getting an approved loan.

Another major consideration is the amount of equity that the homeowner has in the property. The equity is calculated by subtracting the amount of money already owed on the property from the professionally appraised value of the property. For example, a family may owe $120,000 on a home that is valued at $200,000. They have $80,000 equity in this house. Instead of going to a home improvement lender, the family may refinance their first mortgage. By borrowing 80% or less of the appraised value, the applicant avoids paying PMI (private mortgage insurance). In this example, the family could borrow up to $160,000 (80% of $200,000). The first mortgage would be paid and the borrower would receive $40,000 cash less the closing costs. The benefit of refinancing is that the family only has one monthly payment. If the funds are used to make improvements and upgrades to the home, the value of the house may go up even higher than $200,000. That is why using equity for actual improvements to the house are the best use of the money. The Proverbs writer advises that: "He that trusteth in his riches shall fall; but the righteous shall flourish as a branch. He that troubleth his own house shall inherit the wind: and the fool shall be servant to the wise of heart" (Proverbs 11:28-29). To use one's residence as collateral for purchases that do not maintain or increase the value of the residence is an example of troubling one's home.

If a borrower does not want to refinance a first mortgage to take out the equity, she may seek out a home improvement lender for a second mortgage or a home equity line of credit (HELOC). Let's continue with the above $200,000 property with the $80,000 of equity. The house will still be used as collateral, but the loan may be approved up to the $80,000 amount or even more. Because this is a separate loan, the borrower does not have to pay PMI. In most cases, the interest on the second loan or HELOC will be tax deductible no matter how the money was spent. Before signing the closing documents, the applicant should receive a good faith estimate from the home improvement lender. This document provides important information about the interest rate, the length of the loan, the number of points that need to be paid, the closing costs and fees, and the amount of the monthly payments. The proceeds of a second mortgage will be given to the borrower. A HELOC is a line of credit that the borrower can access as needed. Prospective borrowers should be sure they understand the terms of the loan. The interest rate may be variable, which means it can go up or go down depending upon the movement of the relevant index. It's also important to know if there are pre-payment penalties if the loan is paid off early. Most financial experts advise that applicants avoid loan products that include pre-payment penalties. By obtaining a good faith estimate from the home improvement lender, the applicant can compare the offered terms with those offered by the company's competitors.

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