Renovations are a part of life for many homeowners, and ones that are well done can greatly increase the overall value of a home. But many people usually don’t have the sort of cash necessary for a thorough home renovation, and this means they’ll need a loan of some sort. While the prospect of applying for a loan can be daunting, the reality is that it is not difficult to get a loan for your home renovation.
How to Settle the Numbers
Step 1: Evaluate how much you need to spend. At this point, you likely have a firm idea of what you want to do to your home.
Whether it is a kitchen remodel, a new addition, or a total revamp of your home, you should get a sense of how much the renovation is going to cost you. You can do this by getting quotes from contractors for the work you want done on the home.
This is important because banks are more likely to give you a loan when you come in with specific numbers that are in line with actual costs. If the bank thinks you are just angling for loads of cash without any idea of what your costs are, this could be taken as a sign of irresponsibility.
Step 2: Determine the amount of the loan. Now that you have an idea of how much the renovation will cost you, you need to figure out if you can actually qualify for that amount.
One factor that goes into the loan amount is the loan-to-value (LTV) ratio. Generally, the amount of money you qualify for is 80% of the value of the home, with the total balance left on the current mortgage subtracted from that amount.
So on a $200,000 home, the most you could qualify for is $160,000. And if you still have a mortgage balance of $100,000, then the maximum loan amount would be $60,000.
Step 3: Figure out how much you can afford to pay. Once you have an idea of how much you need and how much you can get, you need to decide how much you can afford.
The primary metric that a lender will use is the monthly debt-to-income ratio. This is total amount of your current debts and the future monthly payment on the loan divided by your total monthly income.
So if you owe $1,800 a month in debts and your total monthly income is $7,200, then your monthly debt-to-income ratio is 25%. In general, you want to keep this below 36% to remain viable in the eyes of a lender.
How to Acquire a Home Renovation Loan
Step 1: Reach out to lenders. Once you have all your numbers in mind, you can begin to reach out to various lending institutions to determine who offers the best deal.
Remember, you need to keep interest rates, loan terms, and other fees in mind as you are shopping around. Some banks might be willing to give you a little more money, but the interest rate might be high.
Step 2: Complete the process. Once you have decided on a lender and loan, sign any necessary paperwork and pay any fees.
Make sure you fully understand what you are agreeing to and then finish the process. You can now get started right away on making the renovations.
Getting a loan for your home reno takes a little bit of research on your part, but at the end of the process, you’ll be well on your way to a great renovation.