How to Get a Home Improvement Loan with No Equity
If you haven’t built up much equity in your home but need to tackle some home repairs, a home improvement loan with no equity allows you to finance up to 100% of the renovation costs. Lenders offer a variety of no-equity home loan options so you can avoid tapping credit cards or emergency savings.
Options for home improvement loans with no equity
Most no-equity home improvement loans are designed to help you finance repairs or upgrades to make your home more livable or functional. Home improvement loans backed by the Federal Housing Administration (FHA) are pickier about the types of projects you can finance. However, there are renovation loan options that will give you more freedom to do the work yourself or offer a broader choice of acceptable renovations, even if you have little to no equity.
FHA Title I loan
The FHA Title I loan program helps low- to moderate-income homeowners with no equity finance repairs and improvements to their homes. It’s meant for small projects to update your home, or to make it more useful or habitable. Improvements might include installing new flooring or a new roof, or making the home accessible to a disabled family member.
An FHA Title I loan is a second mortgage, meaning it’s placed behind your primary mortgage. You’ll make an additional payment for the loan, on top of your primary mortgage. FHA Title 1 loans have terms ranging from six months to 20 years and low, fixed interest rates.
Pros and cons of AN FHA Title I loan
- You can borrow up to $25,000 to improve a single-family home.
- You can get an unsecured $7,500 loan for minor items, such as appliance upgrades.
- You benefit from easy FHA qualifying guidelines with no minimum credit score requirement.
- You won’t need a home appraisal.
- You won’t be able to make major improvements.
- You’ll pay a 1% annual insurance premium.
- You’ll have two mortgage payments to make every month.
FHA 203(k) loan
Unlike an FHA Title I loan, the FHA 203(k) rehabilitation loan allows you to buy or refinance a home and remodel it with one mortgage.
You can opt for a limited or a standard 203(k) loan. The limited 203(k) loan is for smaller renovation projects that don’t require any structural work. The standard 203(k), however, is a more involved program requiring a certified Housing and Urban Development (HUD) consultant to keep the project running smoothly. The consultant also controls the release of funds and verifies that the improvements meet program guidelines.
Pros and cons of the FHA 203(k) loan
- You can combine the costs of buying and fixing up a home in one loan.
- You’ll qualify with a credit score as low as 500 with a 10% down payment. With a 3.5% down payment, the minimum score is 580.
- You can refinance up to 97.75% of the value of your home with a minimum score of 580, or up to 90% if your score is between 500 and 579.
- You’ll be able to choose from a wider array of renovation projects than you would with a Title I loan.
- You’ll need to complete the project within six months.
- You’ll pay higher mortgage insurance premiums than FHA Title I loans.
- You’ll pay a higher interest rate and closing costs (and additional fees) if a 203(k) consultant is needed.
THINGS YOU SHOULD KNOW
If you’re short on cash to complete your home renovation, you can combine the two FHA no-equity loan programs to increase your borrowing power. The 203(k) loan will usually cover the purchase price of the home, and the Title I funds will absorb the repair costs.
You may want to add funds from an FHA Title I loan if you run into unexpected costs on a 203(k) project. This may come in handy if you need $7,500 or less, especially since the loan won’t be secured by your home.
VA renovation loan
If you’re wondering how to finance a remodel without equity and you’re eligible for a loan backed by the U.S. Department of Veterans Affairs (VA), you may be able to get a VA renovation loan. Eligible military borrowers and their spouses can buy or refinance a home, and roll in up to 100% of renovation costs and loan fees in a single loan.
Here’s an example of how a VA home improvement loan works if your sales price is $200,000, the home needs $30,000 worth of repairs and closing costs are $2,500.
- Add up your costs: $200,000 + $30,000 + $2,500 = $232,500.
- Order an appraisal and provide the appraiser with information about the project.
- Finance 100% of your renovation if the appraised value is $232,500 or more.
Pros and cons of the VA renovation program
- You may be able to finance 100% of the costs of a renovation project.
- You aren’t restricted to make specific repairs.
- You’ll qualify based on the VA’s lenient borrowing guidelines, such as no mortgage insurance, down payment or minimum credit score requirement. (Note: VA-approved lenders typically require a 620 score).
- You must use a licensed contractor on the VA’s approved builder list.
- Your renovation loan amount may be limited by your lender.
- You may have to pay a construction fee of up to 2% of your loan amount.
Supplemental VA loans
Supplemental loans are available to homeowners with a current VA mortgage. Renovation costs can be added to your existing loan balance or as a separate second mortgage. These smaller supplemental loans are meant to cover basic repairs.
A VA appraiser must confirm the cost of the repairs and ensure the current sales price or VA loan balance doesn’t exceed the home’s value. If the cost of the repairs is $3,500 or less, a VA appraisal is not required.
Fannie Mae HomeStyle RenovationⓇ loan
The Fannie Mae HomeStyle Renovation loan is a conventional loan program, and qualifying requirements are more stringent. You can finance the cost of remodeling whether you’re buying or refinancing a home. A bonus: If you’ve got some construction chops, you may be able to do some of the work yourself.
Pros and cons of the HomeStyle Renovation loan
- You can buy a home and fix it up with a down payment as low as 3%.
- You can finance the repairs on an investment property.
- You have the option for do-it-yourself renovations, up to a certain limit.
- You may finance mortgage payments into the loan.
- You’ll need a minimum credit score of 620.
- You may need to budget for anything that runs over budget; lenders typically call this a “contingency reserve.”
- You’ll provide more paperwork than you would for a regular loan.
THINGS YOU SHOULD KNOW
You can borrow money on the HomeStyle Renovation program based on the “as-completed” value of your home. That means the lender bases the loan on the estimated value of your home after the renovations are finished. Most mortgage programs approve your loan based on the “as-is” value, giving you less borrowing power.
Good uses of a home improvement loan with no equity
Lenders may require repairs that could impact the property’s safety, like a leaky roof or a broken window. Once those are done, you can focus on renovations that might add value to your home, like a kitchen or bath remodel.
According to HUD, here are lists of acceptable repairs and improvements you can pay for with no-equity home loans.
Structural improvements that add to the safety and habitability of your home include:
- New roof and gutters
- New air conditioning unit
- Plumbing and electrical upgrades and replacement
- Minor kitchen and bath remodeling
- Flooring upgrades, including replacing carpet, tile or wood
- Weatherstripping and insulation
- New kitchen appliances or washer/dryer units
- Major landscaping work or site improvements
Structural alterations that add to the safety or energy efficiency of your home, such as:
- Mobile accessibility improvements (for disabled residents)
- Energy-efficient improvements
- Decks, patios or porches
- Septic or well system
- Basement completion or waterproofing
Poor uses of a home improvement loan with no equity
Before adding a wood deck or a sunroom, check out Remodeling magazine’s latest Cost vs. Value Report to see what home upgrades will get you the most bang for your renovation dollars. You might save money on overpriced upgrades that won’t ultimately add value to your home.
Government-backed renovation loans typically prohibit the following home improvements for no-equity loan products:
- Jacuzzi tub
- Room addition or add-on
- Moving a load-bearing wall
- Barbecue pit, outdoor fireplace or hearth
- Tennis court
- Exterior additions like a guest house or bathhouse
3 ways to boost your home equity
The faster you pay off your loan balance, the faster you build home equity. If you’re hoping to avoid a no-equity home loan in the future, take these steps to boost your home equity.
1. Pay extra on your mortgage each monthAdding one extra mortgage payment per year can take four years off of a 30-year loan term. Making biweekly payments will help you accomplish the same objective: Every little bit helps grow your equity.
2. Refinance to a shorter, 15-year mortgageIf you can afford the bump in payment, a 15-year mortgage will help you build equity much faster than with a 30-year term. You’ll also pay less interest over the life of the loan.
3. Pay your principal down and recast your loanUsing a big bonus or unexpected cash windfall to pay down your loan is a good way to build equity quickly. You can also request a mortgage recast at the same time: This is when your lender recalculates your loan based on the reduced balance, giving you a new lower payment.