In this article, we’ll cover everything you need to know about credit score requirements for home improvement loans and how to secure one with bad credit. 

What Is the Minimum Credit Score for a Home Improvement Loan?

It helps to have an idea of what lenders consider good or bad credit scores. All credit scores range from 300 to 850. Only some scores are eligible for the best interest rates.

According to the Consumer Financial Protection Bureau, the best rates go to borrowers with credit scores in the mid- to high-700s or above. While borrowers with credit scores in the higher 600s won’t have trouble getting a loan, they often pay higher rates than borrowers in the top range.

Your credit score is a reflection of how you handle debt, so the higher your score, the better. This not only helps you qualify, but it can mean much better rates and favorable terms. For example, most lenders offering RenoFi Loans, require a minimum score of 640, while others may require 680 for a home improvement loan. The difficulty begins for borrowers in the low 600s. This group pays the highest rates and may also have difficulty getting a loan at all when going through traditional lending channels. 

The Benefits of Having Good Credit When Applying for Home Improvement Loans

Having a strong credit score is a major benefit when applying for a home improvement loan. Applicants with good credit receive offers with the most favorable interest rates and terms. These borrowers also have more flexibility and choice when it comes to the types of loans available to them.

Getting a loan with a lower interest rate ultimately makes your home improvement less expensive because you’ll pay less in interest over your repayment period, which depending on your terms, can be several years.

Common Types of Home Improvement Loans

When it comes to financing your home improvement projects, there are several types of loans available, each with its unique features and requirements, including minimum credit scores. Here’s an overview of some common home improvement loans:

Home Equity Loans

A home equity loan allows you to borrow a lump sum against the equity you’ve built up in your home. It’s typically used for large-scale renovations. These loans come with fixed interest rates and a repayment period that usually ranges from 5 to 30 years. To qualify for a home equity loan, lenders typically require a minimum credit score of 620-680, depending on the lender.

Home Equity Line of Credit (HELOC)

A Home Equity Line of Credit, or HELOC, works more like a credit card. You can borrow as much or as little as you need over a draw period, typically 10 years. After the draw period ends, you’ll start repaying what you borrowed. But HELOC rates are variable, meaning the rate can fluctuate and change over time due to market conditions. Most lenders require a minimum credit score of 620 for a HELOC, but some may require a higher score.

Cash-Out Refinance Loans

Cash-out refinance involves replacing your current mortgage with a new one for an amount that’s more than what you owe on your house. The difference is paid out in cash, which can be used for home improvements. Cash-out refinance requirements include a minimum credit score of 620-680, but the exact number can vary by lender.

Personal Loans

Personal loans are unsecured home improvement loans, meaning they don’t require collateral. They can be used for smaller home improvement projects. Personal loans often have higher interest rates than secured loans like home equity loans or HELOCs, which use your home as collateral. Lenders typically require a minimum credit score of 600-700 for personal loans, depending on the lender and the loan amount.

Government-Backed Loans

There are also government-backed loans such as FHA 203(k) loans and VA renovation loans. FHA 203(k) loans are insured by the Federal Housing Administration and allow you to borrow money for home improvements and the home purchase price in one loan. 203K loan lenders will require a minimum credit score of 500-580. VA home improvement loans, on the other hand, are available to veterans and active-duty military members and allow for both home improvements and the home purchase price. They typically require a minimum credit score of 620.

Factors Influencing Approval

What are lenders looking for when reviewing your loan application? Here’s a detailed look at some of the approval criteria we touched on earlier in this article:

  • Debt-to-income (DTI) ratio: This is your monthly debt payments divided by your gross monthly income. It gives lenders an idea of your ability to pay back a loan based on your monthly budget. Lenders want to see a DTI ratio below 35%.
  • Credit utilization ratio: This represents the amount of credit you’re using divided by the amount of credit available to you. It gives lenders an idea of how you’re managing your current debt. Keeping credit utilization below 30% impresses lenders.
  • Employment history: While rules vary by lender, most banks want to see tax returns proving two years of consistent employment and salary.
  • Income: Lenders use your gross monthly pre-tax income to evaluate your borrowing power.

While traditional banks may not adjust your eligibility if you have a lower credit score with a high income, alternative loan options may provide more wiggle room for a low credit score if you have proof of a high income.

Interest Rates and Loan Terms For Homeowners With Poor Credit

Lenders determine credit rates based on borrower risk. When a borrower has poor credit, a lender will use a higher rate to protect themselves in case a borrower can’t repay a loan. Lenders also mitigate risks against borrowers with poor credit by charging higher origination and loan fees.

Finally, lenders tend to offer borrowers with poor credit loans shorter repayment terms. A bad credit loan term could last anywhere from a few months to several years. While a borrower with bad credit has fewer options than someone with pristine credit, they can still shop around to find a term that works for them.

While these actions may seem punitive, lenders and banks are simply protecting their assets by collecting as much repayment as possible early on because the risk for default is higher.

Improving Credit for Better Loan Options

Discovering that you don’t have the minimum credit score for a home improvement loan can be defeating. Some borrowers solve the problem with alternative borrowing options. Others put plans on hold while they try to improve their credit scores. Here are some ways to improve your credit score to quality for better home improvement loan options:

  • Review your credit report and look for any errors or false late payments that could be harming your score. If you notice anything that looks wrong, file a dispute with the creditor or credit-reporting agency.
  • Make all outstanding or late payments.
  • Pay all bills on time from this point forward. Credit agencies can receive reports on payments that are late by 30 days or more.
  • Consider increasing the limits on your credit cards to reduce your credit utilization ratio.
  • If you’re suffering from not having a robust credit history, ask a relative to allow you to become an authorized user on one of their accounts to piggyback on their strong credit history.
  • If you’ve made major credit mistakes in the past, apply for a secured credit card that allows you to slowly rebuild your credit.

If you’re attempting to build credit for the first time, it typically takes six to 12 months to establish your score. Repairing credit could take anywhere from several months to several years.

Collections and late payments will remain on your credit report for seven years. However, strengthening the areas that you can control by reducing your DTI ratio, improving your credit utilization ratio, and paying all future bills on time can show noticeable improvements to lenders.

The Benefits of Using RenoFi for Your Home Improvement Loan

With the minimum credit score for home improvement loans from most lenders being in the high 600s, financing much-needed renovations can feel like an uphill battle for some homeowners. Lenders often penalize homeowners who are eligible for loans with bad credit with higher interest rates. While collateral loans and government loans can open some doors, borrowers looking for home renovation loans with favorable rates and flexible terms should consider looking at RenoFi Loans.

A RenoFi Loan uses your home’s after renovation value to determine your borrowing power and, if you’ve locked in a great rate for your mortgage already, our advisors look for options to help you keep it.  Working with RenoFi to finance your home improvement projects comes with numerous benefits that can make your renovation journey smoother and more affordable.

Access to Substantial Funds: RenoFi Loans enable homeowners to access significant funds, which can be particularly beneficial for large-scale renovations or multiple simultaneous projects. This financial flexibility means homeowners can transform their homes without compromising on quality or design due to budget constraints.

Flexible Usage: With RenoFi Loans, there are no restrictions on how you can use the funds. Whether it’s a kitchen remodel, a bathroom renovation, or adding an extension, these loans provide the versatility to cover a wide range of home improvement expenses.

Competitive Interest Rates: Compared to other unsecured loans such as personal loans or credit cards, RenoFi Loans come with competitive interest rates. This could potentially save homeowners a substantial amount of money over the life of the loan.

Predictable Payments: RenoFi Loans offer fixed interest rates and set repayment terms, providing predictability and stability. This allows homeowners to plan and budget effectively without worrying about fluctuating loan payments.

Potential Tax Benefits: In some cases, the interest paid on RenoFi Loans may be tax-deductible. This potential tax benefit could reduce the overall cost of your renovation project, making it an even more affordable option.

Increased Property Value: By funding home improvements through a RenoFi Loan, homeowners have the potential to significantly increase the value of their property. These improvements can attract potential buyers and yield a higher resale value, making it a smart investment in the long run.

Streamlined Application Process: RenoFi has streamlined the loan application process, making it easier and faster for homeowners to secure the necessary financing for their renovations. This efficient process saves time and helps homeowners kick-start their home improvement projects sooner.

FAQs on Home Improvement Loans With Bad Credit

What is the minimum credit score necessary for a home improvement loan?

Most lenders require a minimum credit score of 680 for a home improvement loan. Some lenders offering bad credit loans reduce requirements to as low as 580 to 600. You could even be eligible with a score of 500 when using alternative lending options.

What are some alternative financing options for home improvements for those with bad credit?

Using a secured loan, applying for a government home improvement loan, or having someone co-sign on your loan are all ways to get a home improvement loan if you have bad credit.

How can someone with a bad credit score improve their chances of securing a home improvement loan?

First, you may need to look beyond traditional banks that have stringent lending requirements. But the most important thing anyone with poor credit can do is try to improve their credit score by making payments on time, reducing their debt-to-income ratio, and improving their credit utilization ratio. Finally, review your credit report to look for any disputable errors that could be harming your credit.

Do all lenders focus on credit score for home improvement loans?

Your credit score is one of the top factors in determining your eligibility for a home improvement loan. While banks are rigid about minimum credit score requirements for home improvement loans, alternative lenders tend to spread weight across credit score, income, and other factors.

What are the potential impacts of a bad credit score on home improvement loan terms and interest rates?

Borrowers with bad credit receive home improvement loan offers with higher interest rates and shorter loan terms. Fees on bad credit score home improvement loans are also usually higher.

RenoFi Loan Comparison Chart

Traditional home improvement loanMinimum credit score of mid-600s.
RenoFi LoanOffers $25,000 to $500,000 based on a home’s after-renovation value.
Secured loanRequires you to put up collateral in the form of a home, car, stocks, or other asset.
Co-sign loanRequires you to ask someone to sign on to be responsible for your loan debt.
Government loanOffers lower borrowing limits with restrictions on the types of projects loans can fund.

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