Home Repair Loans: 2 Options That Limit the Hit to Your Bank Account

Home Repair Loans: 2 Options That Limit the Hit to Your Bank Account

home-repair-contractorHaving trouble finding a home repair loan to finance your major and urgent home maintenance project? Read on to learn which one of the two common home repair loans can help you.

Have you ever wondered whether your home has a mind of its own?

Perhaps your pipe burst. Maybe your water heater broke right before your in-laws were scheduled to stay over. Or your air conditioner suddenly gave out right before the year’s longest heat wave.

Regardless of what happened, if you’re facing an unexpected home repair project, you may feel like your home is acting out. It’s time for some much-needed home maintenance.

Even if you aren’t part of the 25% of homeowners that fear they can’t complete necessary maintenance, home repairs can feel daunting. You have to find a contractor. Go over materials. Check your insurance coverage. The to-do list seems never ending.

Repairs also cost a pretty penny – anywhere from a couple hundred bucks to tens of thousands of dollars – and finding the right home repair loan can be tough. 29% of homeowners worry they don’t have money to pay for these projects. That means one-third of homeowners across the nation risk turning to bad financing options like credit cards. As this Washington Post article describes, using credit cards for your remodel can put you in unnecessarily large debt.

That’s where this article helps. In just five minutes, we’ll tell you all you need to know about the most popular home repair loans – personal loans and FHA loans – so you make confident and responsible decisions for your home repair.

Here’s the key point: personal loans are perfect for urgent home repairs while FHA loans can address home maintenance projects when you have time to plan ahead.

Personal loans for home repair

You’ve just got home from work. You’ve been looking forward to curling up on your couch all day: there’s an episode of your favorite show on your DVR and leftovers in the fridge. You’re set.

Until you feel a faint drip on your nose. Soon the drips come faster. You look up–and you’ve got a leak. A half hour later, you have a flood.

A personal loan can help you get back to a calm night with your DVR as soon as possible.

A huge perk of personal loans is how fast these home repair loans let you get started. Personal loans help you begin your remodel in two weeks or less. Shopping for personal loan rates tonight could even mean getting money in your bank account tomorrow.

Personal loans are also great for home maintenance because they don’t require home equity. Whether you just moved into your house and don’t enough home equity or simply don’t want to tap into your equity for a home repair, personal loans never require your home as collateral.

Personal home repair loans have fixed-rates, which means your interest rate won’t change over the loan’s 3-7 year term. Rates on loans for home repair are determined by factors like your credit score and income. Higher credit scores typically translate to lower rates on home repair loans. Personal loan interest rates average between 10-20%. Borrowers with credit scores as low as 580 can qualify for personal loans, with the best rates available to borrowers with great credit.

You can explore how factors like loan amount, term, and interest rate affect your monthly payments by using Hearth’s home improvement loan calculator. Using this tool could help you build a budget and see what you can afford for your home repair.

However, there are a few downsides to keep in mind about personal loans.

Personal loans typically have lower rates than credit cards, but higher rates than FHA home repair loans. Personal loans offer no tax advantages (unlike some other secured options, like a traditional home equity loan) and may also be subject to 1-5% origination fees.

When personal loans make sense

Here’s how you know when a personal loan makes sense for your home repair project:

  • You don’t have time to save cash or go through a long approval process for an urgent home repair.
  • You don’t have or don’t want to use home equity.
  • You have a credit score 580 or above.
  • You want to pay off your debt quickly (3-7 years).

How to get a personal loan

Think of comparing personal loans rates like shopping for a car. You head out to multiple dealerships to get an idea of your options. Maybe you take a few cars for a test drive. And if no car speaks to you, you can of course head home without buying a car. But if you find the model you want, you try to find the dealer with the lowest price.

Hearth’s home repair loan comparison tool works the same way, but it’s all from the comfort of your home and takes about a minute. Find rates with three simple steps:

  1. Fill out our secure 60 second application. Our process is free and won’t impact your credit score.
  2. Compare personalized rates from our multiple lending partners: SoFi, Prosper, Avant, Lending Club, Best Egg, and Freedom Financial. Assessing your options helps you find a great deal.
  3. Pick the personal loan that is right for you. You could have money in your bank account as soon as tomorrow for that urgent repair.

You can also learn about personal loans for specific repair projects by visiting any of the resources below:

FHA home repair loans

Federal Housing Administration (FHA) loans are home repair loans backed by the government, which allows lenders to offer you low interest rates (around 2-5%) – translating into savings.

Sound like a pretty good deal so far? Let’s take a moment to think back to the dreaded leak that ruined your night in.

How could an FHA loan have helped you? The simple answer: it probably couldn’t.

“Wait, how is that possible?” you think.

FHA loans take 1-3 months to put funds in your bank account, so they’re best for home repairs you can see coming. These repairs include redoing electrical wiring so it’s up to code, replacing outdated pipes, or addressing large projects for the fixer-upper you just bought.

FHA loans can adapt to cover many home improvement projects because these home repair loans come in two different forms: 203k loans and Title I loans.

Let’s take a deeper dive into both.

FHA 203k home maintenance loans

A 203k loan helps you purchase and then immediately repair a home – rolling both costs into your mortgage. FHA-authorized dealers offer these loans with fixed rates (your interest rate stays the same year to year) or variable rates (your interest rate rises and falls as the market changes).

FHA loans are available to people with credit scores as low as 500. As of July 2017, homeowners with FICOs 580 and above qualify for a 3.5% down payment. Otherwise, a 10% down payment is required for credit score 500-580. 203k loans tend to be used for homeowners who struggle to afford the down payment on the house and need to renovate after purchase.

FHA home repair 203k loans also require an upfront mortgage insurance premium (MIP) of 1.75%. Another annual MIP fee may also be added to the principal on your loan. A MIP is required on a FHA loan to protect the lender in the case you default.

FHA 203k loans break down into two subtypes:

  • Standard FHA 203k loans may lend you up to 110% of your home’s value. However, these loans must be used for projects above $25,000 and require a 3.5-10% down payment on your mortgage. Consider a standard FHA 203k loan for extensive home repairs that you’ll make right after you purchase a home.
  • Streamline (or limited) 203k loan, which are used for projects $35,000 or less. You can apply for these FHA streamline loans even after you have purchased your home – but only if you have a 203k mortgage. Choose a streamline over a standard 203k for smaller or midsize projects.

Both types of FHA 203ks loans require your project to be completed 6 months after receiving your funding. Only consider FHA home repair loans if you know you can finish your project within this timeline or you will be left without funding from your lender to finish your home repair.

FHA loans are typically only approved if your home is dilapidated, was bought from foreclosure, or is unlivable without necessary home repairs.

FHA Title I loans

Title I loans have more stringent requirements than 203k loans.

Title I loans cannot fund projects over $25,000, like a standard FHA 203k loan can. These are also the only type of FHA loan that requires home equity. You’ll need to put your home up as collateral for any project with a price tag greater than $7,500 if you use a Title I loan.

Terms for FHA Title I loans are 12-20 years, so you may be paying off your major home maintenance for longer.

Due to the funding cap on Title I loans, they’re best used for midsize home repairs – like buying a brand new water heater, repairing or replacing your roof, or redoing your plumbing system.

Bottom line: If you’re buying a house and immediately renovating it, go for the 203k standard loan. If you’ve already moved in, Title I loans and 203k streamline loans can work for small to midsize projects, but opt for the 203k streamline if you don’t have home equity.

FHA loan restrictions

All FHA loan users must follow government rules.

If you’re doing major home repairs and are considering DIY, a FHA loan may not be the right fit. FHA loans typically require your contractor and project plans be approved by a lender. For smaller home repairs that fall under streamline or Title I loans, you should ask your lender if saving some labor costs by using some of your own elbow grease is ok.

Also make sure your property qualifies for FHA funding. Homes that are too expensive may not qualify, since their repairs may cost more than the FHA loan limit.

The condition your home is currently in also matters for FHA underwriters. For example, if your home has termite damage, you may be required to hire an exterminator on your own dime before the FHA gives you a home repair loan for other projects.

Lastly, the FHA has strict property type requirements, so it’s worth reviewing them to make sure you qualify.  For instance, vacation homes are not eligible.

When FHA loans make sense

Here’s when an FHA loan makes sense:

  • You are buying a home that needs immediate repairs.
  • You have been in your home for awhile and want to make repairs that are not urgent.
  • You are not making luxury repairs.
  • You are not a DIYer.

How to get a FHA home repair loan

You can only find FHA loans through an approved lender or mortgage broker. The FHA has a list here.

Once you find a lender, you’ll be required to go through their online or hard copy application. Read it thoroughly and provide as much detailed information as possible. FHA underwriters who approve your application can take anywhere from 2-6 weeks – if your paperwork is correct.

Home repair loans: which is best?

Let’s recap your financial choices for your home maintenance.

Personal loans are great choices for urgent home repairs, or if you’re looking to maintain your home without using home equity. These loans have lower rates than credit cards and short terms of 3-7 years.

FHA loans come in two types. An FHA 203k loan can be used for home purchase and simultaneous repairs or for midsized projects after you’ve purchased a home. FHA Title I loans are good for home repairs on the smaller side or if you’re willing to use home equity to receive more funding. In either case, the approval process can take anywhere from 1-3 months, but you’re likely to get lower rates than you would with a personal loan.

You can explore other options in our homeowner’s guide to home improvement loans if neither option sounds like a good fit for your home repair. Informed by personal finance experts, our guide will arm you with the information you need to choose the best option for your home repair.