Loans to remodel a home: A guide to your options

Remodeling a home can be an exciting but expensive endeavor. Whether you're looking to update your kitchen, add an extra bedroom, or improve energy efficiency, finding the right financing option is crucial.

Fortunately, there's no shortage of options for homeowners. Home remodeling loans come in different forms, depending on factors like your credit score, home equity, and financial situation.

This post will explore the different types of loans to remodel a home and their requirements. 

Loans to remodel a home

Unsecured loans

Unsecured loans don’t require collateral, meaning you won’t have to put something valuable on the line to qualify. However, these loans often come with higher interest rates and shorter repayment terms compared to secured loans.

Personal loans

Personal loans for home improvement are a popular option for tackling projects, as they cost less upfront, provide a quick turnaround on funds, and don't require collateral. However, since interest rates tend to be higher and the repayment period is shorter (1 to 7 years), you can expect higher monthly payments. Because of this, personal loans typically make sense for smaller remodeling projects. 

Requirements: Rates and terms depend on your financial backing. Lenders generally look for good credit, stable income, and a solid debt-to-income ratio. 

Construction loan

If you've got an extensive renovation project or full home rebuild on the horizon, a contractor loan might be a good fit for your needs. They’re short-term loans and offer funds in phases, as the renovation progresses. Once the work is completed, the loan can either be paid off or converted into a permanent mortgage.

Interest rates are similar to personal loans, and requirements vary based on the construction loan lender.  

Government-backed loans

Government-backed loans tend to offer lower interest rates, less upfront costs, and more flexible terms than other financing options. However, they cater to specific homeowners, which can make them harder to qualify for. 

FHA 203(k) loan

An FHA 203(k) loan is a government-backed mortgage that includes the cost of home renovations. With a single loan, you can finance both the purchase and renovation of a property. Borrowers can get up to 110% of the after-renovation home value, with a minimum required down payment of 3.5%. The property must be the borrower's primary residence, and renovations must meet HUD guidelines.

VA renovation loan

The VA renovation loan supports eligible veterans and active-duty service members with financing at competitive interest rates and favorable terms.

The maximum loan amount is based on VA loan limits, which vary by location. Renovations must also be approved and completed by VA-approved contractors, and the home must meet VA property standards.

USDA home repair loan

If you live in a rural area and have a low income, the USDA home repair loan is worth exploring. The loan offers affordable financing for necessary home repairs and improvements. 

You can receive up to $40,000, with repayment terms of up to 20 years at low interest rates. Eligibility is based on income limits, and the home must be in a USDA-designated rural area.

FHA title 1 loan 

The FHA Title 1 loan is another government-backed option for home remodeling. You can borrow up to $25,000 for a single-family home, with terms up to 20 years. There's no set minimum credit score, but various lenders have their own requirements.

Fannie Mae HomeStyle loan

The Fannie Mae HomeStyle loan allows homeowners to finance renovations through a conventional mortgage. The loan can be used for a wide range of improvements, anywhere from minor updates to major structural changes. It can also be used for primary or investment properties. 

Borrowers can finance up to 75% of the home’s after-renovation value, and projects must be completed by licensed contractors.

Requirements: To qualify, you’ll need a 620 credit score or higher, a DTI below 45%, and sufficient income. 

Freddie Mac CHOICERenovation loan

Like the Fannie Mae HomeStyle loan, the Freddie Mac CHOICERenovation loan allows soon-to-be homeowners to include renovation costs in their mortgage. This loan is ideal for those looking to buy a property and increase its value through upgrades.

Homeowners can finance up to 75% of the home’s after-renovation value. Financing is available for primary residences, second homes, and investment properties. However, renovations must be completed within a 12-month time frame.

Requirements: Borrowers must have a 620 or higher credit score, stable income and employment, and a minimum 3% down payment.

FHA cash-out refinance

An FHA cash-out refinance allows homeowners to replace their current mortgage with a larger loan and withdraw the difference in cash. Borrowers can typically access up to 80% of their home's value, and the home must be the borrower's primary residence.

Requirements: The minimum credit score to qualify for an FHA loan can vary by lender, but is typically around 580. Additionally, homeowners need a DTI of 43% or lower, sufficient equity, a steady employment history, and to be current on their mortgage.

Secured loans

If you're a homeowner with sufficient equity, you have a powerful tool that can provide you with options offering lower interest rates, longer repayment terms, and higher payouts. 

However, most equity-backed products have higher closing costs and fees, longer funding timelines, and can result in foreclosure—so having a payback plan is crucial. 

Use this free tool to gauge your home’s worth. 

Home equity loan

A home equity loan lets you borrow against the equity in your home for a single lump sum payout. These loans have fixed interest rates and predictable monthly payments, making them a stable option for financing home renovations. Interest rates are generally lower than those of other debt products, and the repayment term lasts 5 to 30 years. 

Home equity loans are best for homeowners with significant home equity who need a lump sum for large projects.

Requirements: Homeowners typically need a credit score above 620, a debt-to-income (DTI) ratio of 43% or lower, and sufficient income and equity to qualify. 

Home equity investment (HEI)

A home equity investment is an alternative way to tap into your equity—allowing you to skip the strict requirements of traditional loans and get rid of monthly payments.

You can receive a lump sum in exchange for a share of your home’s future value. You have a flexible 30-year term and can repay the investment when you sell, refinance, or use another source of funds. 

Requirements: Homeowners need sufficient equity and a credit score above 500 to qualify—there are no income or debt-to-income requirements. 

Home equity line of credit (HELOC)

If your home remodeling budget isn't fixed, then a HELOC can give you access to a line of credit that works similarly to a credit card—at a much more affordable rate. During the 5 to 10-year draw period, you can borrow as needed up to a predetermined limit, making interest-only payments. Once the draw period ends, you'll be on the hook for principal-plus-interest payments at a variable rate. 

HELOCs are best suited for projects with ongoing expenses, such as phased renovations. Estimate your payments with a free HELOC payment calculator.

Requirements: To qualify, you'll need a credit score above 680, a DTI of 43% or less, and sufficient equity and income. 

Cash-out refinance

A cash-out refinance replaces your existing mortgage with a larger loan, allowing you to pocket the difference in cash. Since you're effectively getting a new rate and term, this can be a great way to fund improvements and secure a lower mortgage rate. 

Requirements: A credit score above 620 is usually preferred, a DTI of 45% or less, and sufficient income and equity are needed to qualify. 

Pace loan

If you're in the market for energy-efficient home improvements, like solar panels or insulation upgrades, a Property Assessed Clean Energy (PACE) loan can be a solid solution. Rather than monthly payments or refinancing, you get cash upfront and repay the loan through higher property taxes. This allows you to spread renovation costs over a 30-year term. 

Similar to other home-backed loans, PACE loans come with origination fees and interest. PACE lenders can also initiate foreclosure should you default on the loan. 

Requirements: Lenders require decent credit, sufficient income and equity, and an eligible home improvement. 

Final thoughts

Choosing the right loan for your home remodeling project is a critical part of planning. Before selecting a loan, consider the pros and cons, as well as, how home improvement financing aligns with your long-term goals. 

‍Tap into your home equity with Point’s Home Equity Investment—you can get up to $500K for your next remodeling project without taking on monthly payments.