Best Home Improvement Loans With Bad Credit

Bad credit home improvement loans vs. home equity financing

If you have equity in your home, borrowing against it could be an affordable way to finance the renovation. While you typically need a credit score of at least 620, lenders may have softer qualification criteria on home equity loans and lines of credit because the home is collateral for the loan, meaning they can take it if you fail to repay. Typically, the interest on home equity financing is tax-deductible if you use the funds to pay for home improvements. This isn’t true for personal loans.

Home equity loans and lines of credit

Home equity loans let you lock in a fixed interest rate for a lump sum of cash. HELOCs are open credit lines with variable rates that you draw from as you need for about 10 years. Repayment terms for both can be 15 to 20 years.

Compare to personal loans: Home equity loans and credit lines often have lower rates and longer repayment terms than personal loans. Home equity lenders may also require a home appraisal before approval, meaning you could wait a few weeks or longer to get the funds. Personal loans are typically approved and funded within a week.

Cash-out refinance

A cash-out refinance lets you exchange your current mortgage for a larger one and “cash out” the difference between what you currently owe and the new loan. You use the leftover funds for the renovation. It's typically a good option if rates are lower than what you’re paying.

» MORE: Best cash-out refinance lenders

Compare to personal loans: A cash-out refinance for home improvement projects should have two benefits: You can finance a remodel and lower your mortgage rate. A personal loan will only give you the first benefit. A cash-out refinance may be better for larger projects because closing costs can be 2% to 6% of the loan amount, which might exceed the cost of smaller updates. There are no closing costs with personal loans.

How to compare home improvement loans with bad credit

A home improvement loan could be a good choice if you don’t want to tap equity or max out your credit cards on the project. Just be prepared for high interest rates if you have bad credit.

» COMPARE: Best bad credit loans

Here are some features to compare among bad credit home improvement loans.

APR

The annual percentage rate reflects the full cost of a loan, including any fees the lender charges. APRs are from 6% to 36%, but borrowers with low credit scores can expect a rate on the high end of a lender’s range. Use APR to compare the cost of personal loans and other financing options.

Monthly payments

A home improvement loan calculator lets you preview a loan’s monthly payment at different rates and repayment terms. This can help you determine what loan offer you need to stay within your budget.

Repayment terms

Bad credit home improvement loans often have repayment terms of one to seven years, but some lenders have more limited options. A longer-term loan will have lower monthly payments but higher overall interest costs, so look for a term that strikes a balance.

Fast funding

Many lenders can fund a loan in less than a week, and some say they can get you the funds the day you apply. If you’re paying for an urgent repair or an in-progress project, look for a lender that offers fast funding.

» MORE: How long does it take to get a personal loan

How to qualify for a bad credit home improvement loan

Your credit score is a major factor in deciding whether you get a personal loan, but there are a few things you can do to improve your chances.

• Stay on top of payments. Your payment history is the biggest factor influencing your credit score. On-time bill payments look good on a loan application and help you build credit.

• Pay existing debts to lower your debt-to-income ratio. Most lenders want to see that you have enough cash each month to cover existing expenses, plus the extra loan payment.

• Add a co-signer or co-borrower. Adding someone with better credit and a high income to vouch for you on the application can boost your chances of qualifying or get you a lower rate. However, your co-applicant must repay the loan if you fail to.

• Get a secured personal loan. With a secured loan, you attach collateral to the application, like a car or savings account, in exchange for a lower rate. The lender can take the collateral if you don’t make the payments.

• Pre-qualify. Many lenders let you pre-qualify online to preview your potential rate and loan amount. The process doesn’t require a hard credit pull, so your score won’t be affected, and it can set expectations for the loan you may get.

Home improvement loan alternatives for bad-credit borrowers

Government-insured loans for home improvements

Home improvement loans insured by the Federal Housing Administration are similar to conventional mortgages but have looser qualification requirements. You usually need a minimum credit score of 500 to qualify for any FHA-insured loan.

Rates vary by lender but are often lower than personal loans.

FHA 203(k) renovation loan: With a 203(k) loan, you refinance your existing mortgage and roll home improvement costs into the new mortgage. In addition to meeting a lender’s credit requirements, borrowers must have no foreclosures within the past three years.

The 203(k) loan process can be time-consuming. You must work with a mortgage lender to pre-qualify, a general contractor to create a scope of repairs and potentially a consultant from the U.S. Department of Housing and Urban Development (HUD) to complete an inspection.

FHA Title I loan: The requirement to get this type of loan is pretty broad. According to the HUD website, this loan can be used for home improvements that “substantially protect or improve the basic livability or utility of the property.”

Title I loans under $7,500 are unsecured, while larger loans must be secured by a mortgage or deed of trust on the property, according to HUD.

Family loans

If you don’t qualify for another type of loan but urgently need a small amount of cash, it may be worth asking a friend or relative to lend you the money. Family loans don’t require good credit and they allow you and your friend or relative to decide on interest and repayment terms.