How to Qualify for a RenoFi Home Renovation Loan
A look at the key factors that lenders offering RenoFi loans will consider when looking at your application
Did you recently discover that a renovation home equity loan is the best way to fund your renovations? That’s great! The process of qualifying for this type of loan is nearly identical to applying for a traditional home equity loan — meaning you’ll enjoy the added benefits it offers to create your dream home without any extra hurdles to get there.
If you’re unfamiliar with the typical loan qualification process, there are two main factors your lender will look at when seeing if you qualify for a renovation home loan for your home improvements: your FICO score and your Debt-To-Income ratio. We’ll walk you through each, so you know what to expect when you apply for a renovation home equity loan with a lender. RenoFi is not a lender, but we partner with awesome Credit Unions that provide RenoFi loan products.
What’s a FICO score?
We know you’ve heard of a credit score before. Well, FICO is just another name for it. This 3-digit value is based on the information in your credit report that helps lenders determine how likely you are to repay a loan. It measures how long you’ve had credit, how much credit you have, how much available credit is being used, and if you’ve paid on time.
You can check your credit score for free on a number of sites, or ask your credit card company if they can provide one for you (Capital One is one of many companies increasingly offering this to cardholders).
What’s a good FICO score?
Home renovation loans require a minimum FICO score of 660. Just like your traditional mortgage, the higher your score, the lower your interest rate will be for a renovation mortgage. Anything 720 and above will often get you the best rate available.
What is your Debt-To-Income ratio?
Ok, listen up because this part is really important for home renovation loan qualification! The Debt-to-Income ratio (DTI) is the second key factor that lenders will use to evaluate how much additional debt you can handle and how much of a credit risk you are before lending you money for major repairs.
Your DTI compares what you earn to what you owe as an important measure of your overall financial health. While it seems simple by name, calculating it is a little trickier.
How to calculate your DTI ratio
First, you’ll need your annual income (pre-tax).
Then, you’ll need to total all your existing debt payments.
Debts to include:
- Current Mortgage Payments (your full payment, including taxes & insurance)
- Credit Card Debts
- Student Loans
- Car Loans
- Other loans or debt obligations
Debts you don’t need to include:
- Utilities, such as water, gas, electric
- Living expenses, including grocery bills, parking
- Monthly service bills, like cell phones, cable, internet
Now, enter all the payments into the Debt-To-Income Calculator below, and adjust the income field to your gross annual income. This handy tool will divide all your monthly debt payments by your monthly income to determine your DTI. That’s it! Your lender will use this information to determine how well you handle debt and how much you can borrow for your project, a key part of qualifying for the home renovation loan.
Here’s an example:
A borrower with a mortgage of $1,000, a car payment of $300, a credit card minimum of $200, a home renovation loan cost of $750, and a gross monthly income of $7,100, or (1,000 + 300 + 200 + 750) / 7,100, will have a Debt-To-Income Ratio of 31.69%.
Your DTI Ratio:
What’s a good DTI ratio to have?
The lower your DTI, the better if you’re looking to qualify for a home renovation loan. Lenders consider anything under 20% as low, so if you fall within this range, you’re golden! Anything above 43%, and we suggest looking at different options to lower this number before you apply for a home renovation loan. As a tip, since your DTI looks at monthly payments and not total debt, focus on paying off your highest monthly payments first.
There’s one more thing…
The predictability of your income is important too. Every candidate will fit into one of two categories. Are you a full-time, salaried employee who doesn’t rely heavily on big bonuses or commission? Congrats! You’re a lender’s ideal candidate.
If you work for yourself, have a fluctuating schedule, or are paid hourly or by commission, then you’re going to have a slightly harder time getting approved by a loan officer. Here’s why…
Let’s say your DTI is a solid 30%, but a majority of that monthly income is based on sales commission. In this case, your lender has no guarantee that this number won’t change from one month to the next. The consistency of your income plays a role in the renovation loan qualification process, so the bank can feel more confident they’ll get paid.
If you fall into this category, you should be prepared to provide additional documentation and information to the bank while applying, so the loan officer will feel more comfortable lending to you. Our team can help you prepare for this — for starters, you’ll typically need two years of tax returns showing income at the same levels at which you hope to qualify.
By understanding how to qualify for a RenoFi home renovation loan, you’re now ready to take the next step toward creating the home of your dreams. To find out everything you need to apply for a home renovation loan, take a look at our helpful checklist. Or just contact one of the loan experts at RenoFi to learn more about all of our home renovation loan types, or find a lender to start the application process today.