You’ve signed the loan documents and are getting the keys to your new house. Congratulations. Now comes the fun part of turning your house into a home.
You might see some things you want to change immediately that are simple and inexpensive, like new curtains or wall paint.Others– like a bathroom or kitchen remodel– will be more expensive and need a loan.
Without much equity as new homeowners, a home improvement loan can be difficult to get. But not impossible. Home equity is the difference between a home’s fair market value and the loan balance. Without much equity, it gives a borrower less money to borrow in a home equity loan. If a buyer puts little money down, they’ll have little equity. A homebuyer may purposefully not put much money down because they can’t afford more, or they may want to keep their money liquid elsewhere, such as for investing. Some home loans allow no money down, or a home may drop in value, leading to no equity. Here’s a step-by-step guide on how to get a home improvement loan with no equity.
What does no equity mean?
One common method to get a loan is to use the equity in your home as collateral. Equity is the amount of your home loan that you’ve paid off and “own” in your home.
A home equity loan is also called a “second mortgage.” If the home forecloses, the secondary mortgage is paid after the primary mortgage is paid off. They last for a shorter amount of time than the primary mortgage. The loan is in a lump sum and is paid off at a fixed rate in regular intervals over 10-20 years.
If you don’t have much equity in your home, one option is the FHA Title 1 home improvement loan, which doesn’t need any equity.
That can be beneficial if your home has lost value since you purchased it or if you haven’t had much time to put equity into it. Another advantage of a Title 1 loan is that lenders don’t require that appraisers determine how much your home is worth before approving the loan.
Title 1 loans
The Federal Housing Administration insures Title 1 loans. The loans can be for up to $25,000 and can be used for permanent improvements that protect or improve the livability or functionality of your home. They can’t be used for luxury items such as a new swimming pool.
Here are some advantages and requirements of an FHA Title 1 loan for a single-family home:
- For loans under $7,500, security is seldom needed. Only your signature is needed, and a cosigner isn’t necessary.
- You must be a good credit risk
- Little red tape. The lender can give you an answer in a few days.
- Largest loan term is 20 years
- No prepayment penalties
- If you hire a contractor, you sign a completion certificate after the work is done. The lender then pays the contractor the money you borrowed.
Here are some risks associated with an FHA Title 1 loan for a single-family home:
A major bonus of a Title 1 loan is that no equity or security is required as collateral for a loan of $7,500 or less. If you don’t make loan payments on time, your lender won’t be able to foreclose on your home.
Under a home equity loan, a lender could foreclose if you don’t make payments on time.
A home equity loan can also be difficult to get on manufactured homes such as mobile homes, that are on leased land. A Title 1 loan allows small home improvements on mobile homes.
A Title 1 loan for more than $7,500 requires securing your home as the collateral. That means your lender can foreclose on it if you don’t make monthly payments.
Consider the cost of improvements
If the home improvements you want to do cost $25,000 or less, then a no equity loan through a Title 1 loan can be worthwhile. But that may only be enough money to do minor projects.
Home renovation costs can be expensive. The 2016 Cost vs. Value Report by Remodeling Magazine puts the national average of a minor kitchen remodel at $20,122. That almost triples to $59,999 for a major kitchen remodel.
A mid-range bathroom remodel costs $17,908, compared to $57,411 for an upscale one, according to the report. That might be enough to get you to rethink having the best looking bathroom on your block.
If you don’t have any equity in your home, and don’t want to get a Title 1 loan, there are other options. Including:
Energy efficient mortgage: An EEM is recognized by the federal government. The loan is for energy-saving measures such as a new HVAC system.
An EEM rolls into a primary mortgage. You can get it when you first get your mortgage, requiring no equity.
Primary/purchase mortgages: The FHA 203(k) loan and Fannie May HomeStyle Renovation Mortgage provide a single loan for buying a home and improvements. Each allows more than the actual price of the home to be borrowed.
The largest amount that can be borrowed is tied to the expected value of the home after improvements.
Contractor loans: Contractors who specialize in some areas of home improvement offer their own financing. These include new windows, roofing, flooring, and heating and cooling systems.
The interest rates can be higher than other home improvement loans. They also give you less leverage if the work isn’t done right.
Personal loans for home improvement: Another option is to get an unsecured loan from a bank or other lender. This type of personal loan could be by using your credit card for materials needed for the home repairs or using it for a cash advance.
A personal loan will likely have higher interest rates than a secured loan. A new credit card may offer low or no interest for a certain period, offering savings if you pay the bill in full before the due date.
If you have a car or other collateral that you own for a secured loan, you could go to a bank for a personal loan.
A benefit of not using your home as collateral for a loan is that if you don’t repay the loan, the lender can’t foreclose on you.
The bottom line
Making improvements on your new home is possible without equity. There are options, though you may be limited to how much money you’ll have for the renovations you want.
Look at your home improvement goals and determine if there are things that can wait a few years until you can build up more equity in your home. If not, then look at your personal circumstances to find the best loan options for the renovations you want to do now.
If you’re looking for a home equity loan, SuperMoney offers reviews of th best lenders. Check it out!