Home improvement loans with bad credit: A guide to your options

Homeownership can bring a lifetime of joy. It’s the place where you make those priceless memories with your family, hone your skills with interesting hobbies, and rest peacefully when you’re tired. Sometimes it can bring challenges too, such as if you’re looking to pay for home upgrades or repairs but your credit score isn’t as polished as most lenders prefer.

While it’s true that the best financing and competitive rate options go to people with excellent credit, you still have plenty of options if you have bad credit now. We’ll walk you through the most popular choices for home improvement loans with bad credit, so you can make a confident decision for your needs.  

What is a home improvement loan?

A “home improvement loan” isn’t an official type of loan, like a mortgage or a student loan. Instead, it’s more of a colloquial term that people use for any type of financing they take out to pay for home renovations or improvements. Personal loans and home equity loans are two popular types of home improvement loans. 

Like most loans, you’re more likely to be approved for a loan and to get the lowest rates a lender offers if you have excellent credit, usually defined as 800 or above. It can be tougher to get approved for a loan if you have fair or poor credit, however. 

Just because you’ve had some credit bumps and bruises in the past doesn’t mean you shouldn’t be able to finance a much-needed home improvement project. You may need to look into alternative financing options. 

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Types of home improvement loans

FHA 203(k) renovation loan

The FHA has several loan programs to help lower-income and credit-challenged folks afford homeownership more easily, including its popular FHA 203(k) loan. These loans enable people to purchase a new home or refinance their existing mortgage — with at least  $5,000 left over for home upgrades. The FHA doesn’t give out these loans directly; rather, you’ll need to find a lender who you’ll work with.

To qualify for an FHA 203(k) loan you’ll need a credit score of at least 500. You’ll also need some amount of equity in your home, which is the difference between what your home is worth and how much you have remaining on your mortgage. If your credit score is 580 or above, you’ll need to have at least 3.5% equity in your home to qualify for an FHA 203(k) renovation loan. If your credit score is lower — 579 down to 500 — then you’ll need a bit more equity (10% or more) to qualify.

Since you’ll be refinancing an existing mortgage, an FHA 203(k) loan can be an excellent option if you’re able to qualify for lower rates than you’re already paying on your current mortgage. That makes for a win-win scenario: a cheaper mortgage overall, plus the funds you need to make your home shine. 

FHA Title I loan

Not everyone is willing or able to refinance their current mortgage, and that’s fine. If that’s the case, you may be interested in the FHA Title I loan, which doesn’t touch your mortgage at all. 

Instead, an FHA Title 1 loan operates more like a traditional loan, and you can use any equity you have built up in your home or not — it’s your choice. If you use your home equity as collateral, you can borrow up to $25,000. If not, you’ll be able to borrow up to $7,500. 

These loans also offer flexible term length options, ranging from six months to over 20 years. Like FHA 203(k) loans, however, you can’t use the loan proceeds to purchase “luxury items” like swimming pools, hot tubs, or gazebos. 

Personal loan

Many people choose personal loans because they’re relatively quick and easy to get — if you have good credit. If not, it can be more difficult to find a lender who’ll approve your application, and if they do, it’s often one of the more expensive options you can pick for home improvements.

Some lenders may still be willing to approve a loan with bad credit, but they may require a more creditworthy co-signer or require some sort of collateral, such as your car. Not everyone has those things available. However, if you don’t make all of your payments on time, that could also end up hurting your co-signer’s credit, and you may lose your collateral. 

Home equity loan or HELOC

You might have heard of the term “second mortgage,” as these loans are commonly known. They’re also secured by your home, much like your mortgage is.

A home equity loan gives you a lump sum of cash up front, making it a great choice for one-time expenses like a major home renovation or debt consolidation.

On the other hand, a home equity line of credit (HELOC) works more like a credit card: you’re given a borrowing limit and can draw funds as needed over a set period of time, paying interest only on the amount you actually use. That flexibility makes HELOCs ideal for ongoing or unpredictable costs, such as phased contractor payments or DIY home improvement projects.

Home equity investment

Home equity investments (HEIs) have a lot of advantages over traditional home equity financing options, especially if you have bad credit.

Unlike traditional debt products, which penalize you with lower approval odds and higher interest rates if you have bad credit, HEIs work as a partnership based on your home’s potential. HEIs offer you a lump sum cash payment today in exchange for a portion of your home’s future appreciation. You'll need a credit score above 500 to qualify, and there are no income requirements.

T‍here are no monthly payments over a flexible 30-year term. Rather, you repay the investment plus a share of the appreciation when you sell, refinance, or use another source of funds.

You can prequalify with no impact on your credit, or commitment to start an application, here.

Cash-out refinance

A cash-out refinance operates similarly to an FHA 203(k) refinance loan: you take out a new mortgage for a larger loan amount than you owe now, and use the funds to repay your old mortgage. Since you’re borrowing more than you need to pay it off, you get the difference back as cash that you can use for whatever you want, including paying for home repairs and upgrades.

Cash-out refinance loans aren’t subsidized by the government like FHA 203(k) loans are. That means lenders may have tougher requirements and charge higher interest rates, especially if you have bad credit. If you can’t qualify for a lower rate than what you’re already paying on your current mortgage, there’s not much point in using a cash-out refinance loan since it’ll just make all of your other debt that much more expensive.

How to determine what’s best for you

With so many options to choose from — even if your credit needs some work — it can be tough to decide on the best option. Here are a few questions to ask yourself that might help guide you toward a certain choice:

• Can you afford to wait for financing? You can do a lot to improve your credit and save more money in just a few months. That can help you qualify for a more affordable loan, and if you saved more, you won’t need to borrow as much either.
• How much can you afford each month? Check your budget to see how much you can afford to pay each month, rather than guessing. Home improvement loans for bad credit can be much more expensive, sometimes prohibitively so. If you can’t afford the payments, an HEI is worth investigating further.  
• How much home equity do you have? Some of the most affordable home improvement loans for fair or poor credit require you to have at least 20% equity in your home. If you don’t have that yet, consider an option such as an FHA loan.
• What are the loan costs? An especially salient point if you have bad credit because you may have to pay higher interest rates and fees. A handy tip is to use the APR to compare your different loan options since this measures the total cost of the loan.

Final thoughts

Getting approved for a home renovation loan or home repair loan can be very difficult and prohibitively expensive if you have bad credit. If you’re able to afford the payments, it can be an excellent way to grow your credit score so you’re able to qualify for better financing offers later.

You’re not alone if you can’t afford those expensive monthly payments, however. The good news is you still have options, such as partnering with Point for an HEI to get the funding you need for your home improvement projects. Learn more about how it works today.