How to Get Home Improvement Loans with No Equity
If you recently purchased your home but need to tackle some repairs, you can get home improvement loans with no equity that’ll allow you to finance up to 100% of the renovation costs. There are a variety of secured and unsecured home improvement loan options you can use to avoid turning to high-interest credit cards or dipping into emergency savings.
Options for home improvement loans with no equity
Most low or no-equity home improvement loans are designed to help you finance repairs or upgrades that make your home more livable or functional. Home improvement loans backed by government agencies, like the Federal Housing Administration (FHA) and U.S. Department of Veterans Affairs (VA), limit the types of projects you can finance. However, there are also no-equity conventional loan options that provide a broader choice of acceptable renovations and more freedom to do the work yourself.
Most home improvement loans are secured by your house, but you can opt for an unsecured home improvement loan if you’d prefer not to tie the debt to your home.
Secured home improvement loans
FHA Title I loan
The FHA Title I loan program helps low- to moderate-income homeowners with no equity finance repairs and improvements worth up to $25,000 on a single-family home. It’s limited to projects that make your home more useful or habitable, like installing new flooring, replacing your roof or making the home accessible to a relative with a disability.
How it’s structured: FHA Title 1 loans have terms ranging from six months to 20 years and low, fixed interest rates.
How it’s repaid: You’ll make an additional payment for the loan on top of your primary mortgage. An FHA Title I loan is a second mortgage, meaning it’s second in line to be paid off after your primary mortgage if you go into loan default.
Pros and cons of an FHA Title I loan
| Pros | Cons |
|---|---|
Easy qualification. You benefit from easy FHA qualifying guidelines with no minimum credit score requirement. No appraisal. You won’t need a home appraisal. Flexibility with loan type. You can get an unsecured $7,500 loan for minor items, such as appliance upgrades. | Limited loan amounts. You won’t be able to make major improvements that cost more than $25,000. Insurance premiums. You’ll pay up to 1.05% of the loan annually toward mortgage insurance. More debt. You’ll have two mortgage payments to make every month. |
FHA 203(k) loans
Unlike an FHA Title I loan, the FHA 203(k) rehabilitation loan is designed to help you buy or refinance a home and remodel it all with one mortgage.
You can opt for one of the following types of 203(k) loans:
- The standard 203(k) loan requires a certified Housing and Urban Development (HUD) consultant to keep the project running smoothly. The consultant also controls the release of funds and verifies that the improvements meet program guidelines.
- The limited 203(k) loan is for smaller renovation projects that don’t require any structural work, like replacing a floor or a minor bathroom remodel.
How it’s structured: You must complete the project within six months, at which time your loan will convert from a construction loan to a “permanent” mortgage with a 15- or 30-year term. You can choose a fixed- or variable-rate loan.
How it’s repaid: You’ll repay the loan with regular monthly payments if you choose a fixed-rate loan. However, if you go with a variable-rate loan, your monthly payment amounts will likely fluctuate.
Pros and cons of FHA 203(k) loans
| Pros | Cons |
|---|---|
Convenience. You can combine the costs of buying and fixing up a home into one loan. Easier qualification. You’ll qualify with a credit score as low as 500 if you can put 10% down. With a 3.5% down payment, the minimum score is 580. Refinance options. You can refinance up to 97.75% of the value of your home with a minimum 580 score, or up to 90% if your score is between 500 and 579. Fewer limits on project type. You’ll be able to choose from a wider array of renovation projects than you would with a Title I loan. | Time limits. You’ll need to complete the project within six months. Limited loan amounts. You can’t borrow more than the FHA loan limit for your location. Insurance costs. You’ll pay higher mortgage insurance premiums than FHA Title I loans. Additional costs. You’ll pay a higher interest rate and more closing costs and fees if you end up needing a 203(k) consultant. Restrictions on new homes. You can’t use this loan type for a house that’s less than a year old. |
Need extra borrowing power? Combine FHA loans
If you’re short on cash to complete your home renovation, you can combine the two FHA no-equity loan programs to increase your borrowing power. The 203(k) loan will usually cover the home’s purchase price, and the Title I funds can absorb the repair costs.
You may want to add funds from an FHA Title I loan if you run into unexpected costs on a 203(k) project. This may come in handy if you need $7,500 or less, especially since the loan won’t be secured by your home.
VA renovation loans
If you’re eligible for a loan backed by the VA, you may be able to use a no-equity VA renovation loan to finance a remodel. Eligible military borrowers and their spouses can buy a home and roll in up to 100% of the renovation costs and loan fees in a single loan. You can also refinance an existing mortgage and do renovations, as long as you already live in the home.
How it’s structured: VA renovation loans can have a repayment term up to 30 years. You can also choose between fixed and variable interest rates.
How it’s repaid: You’ll have the simplicity of making a single payment each month, since the renovation costs and loan fees are included in the same loan amount.
Supplemental VA loans
Supplemental loans are available to homeowners who want to renovate a home that’s currently financed by a VA loan. You’ll need to live in the house already, or plan to live in it once the work is complete. These smaller supplemental loans are meant to cover basic repairs, and can’t be used for nonessentials like swimming pools or barbecue pits.
A VA appraiser must confirm the cost of the repairs and ensure that the current sales price or VA loan balance doesn’t exceed the home’s value. If the repairs cost $3,500 or less, a VA appraisal isn’t required.
How it’s structured: Supplemental VA loans that you’ll repay over time can’t carry loan terms longer than 30 years. However, if you’re willing to pay off the loan in a lump sum, your loan term can be as short as five years.
How it’s repaid: You can take out a second mortgage to cover the renovation costs, or simply add the costs to your existing VA loan balance.
Pros and cons of VA renovation loans
| Pros | Cons |
|---|---|
No down payment. You may be able to finance 100% of your renovation project costs. Fewer limits on project type. You can make any repair that is “ordinarily found on similar property” in your area, according to the VA. Easier qualification. You can qualify without making a down payment or paying for mortgage insurance. | Limited pool of builders. You’ll have to use a licensed contractor from the VA’s approved builder list. Fewer lenders. It may be tough to find a lender for this type of loan. Contingency reserves. You may have to set aside up to 15% of the renovation costs to cover unforeseen expenses. |
Fannie Mae HomeStyleⓇ renovation loan
The Fannie Mae HomeStyle Renovation loan is a conventional loan program, and qualifying requirements are more stringent than with government-backed loans. In return, though, you’ll have the freedom to do any type of project you choose — as long as it doesn’t involve totally tearing down and rebuilding the house. You can finance your remodeling costs whether you’re buying or refinancing a home, and can even do some of the work yourself.
One big bonus of a HomeStyle renovation loan is that you can borrow money based on the “as-completed” value of your home. This means that the lender will base the loan on your home’s estimated value after the renovations are finished. (Most mortgage programs approve your loan based on the “as-is” value, giving you less borrowing power.)
How it’s structured: You’ll need to complete the renovations within 12 months, at which point the loan will become a standard 30-year mortgage.
How it’s repaid: Repaying the loan is simple — you’ll make one monthly payment that covers the money borrowed for the home purchase or refinance and renovation costs.
Pros and cons of the HomeStyle renovation loan
| Pros | Cons |
|---|---|
Low down payment. You can buy a home and fix it up with a down payment as low as 3%. Flexible occupancy requirement. You can finance the repairs on a one-unit investment property. Option for DIY work. You have the option to make do-it-yourself (DIY) renovations. Budget-friendly financing. You can finance mortgage payments into the loan if you’re not living in the house right away. | Credit score requirement. You’ll need a minimum 620 credit score to qualify. Contingency reserves. You may need to set aside extra funds for anything that runs over budget. DIY limits. There’s a cap on how much of the loan can go toward any DIY work: 10% of the home’s as-completed value. Documentation. You’ll have to file more paperwork than you would for a regular loan. |
Unsecured home improvement loans
If you want an unsecured loan, a personal loan designed for home improvements may be your best bet. You’ll receive the money in a lump sum and repay it at a fixed rate. Personal loan interest rates will be higher than secured loans, but your payments will be consistent and you can get the money fast — often in one to seven days.
Pros and cons of unsecured home improvement loans
| Pros | Cons |
|---|---|
No collateral. Your house isn’t at risk because the loan isn’t related to your home improvement debt. Less red tape. You won’t have to deal with consultants or appraisers. Quick turnaround. You can get the funds far quicker than you’d be able to with a secured renovation loan or home equity loan. | Higher interest rates. You’ll pay a higher rate with an unsecured loan than you will for a no-equity home improvement loan. No tax breaks. You can’t deduct the interest paid on a personal loan at tax time. More debt. You’ll have to juggle multiple monthly payments, since your mortgage will remain totally separate. |
Good uses of a home improvement loan with no equity
Lenders may require repairs that could impact the property’s safety, like a leaky roof or a broken window. Once those are done, you can focus on renovations that might add value to your home, like a kitchen or bath remodel.
→ Structural improvements that add to the safety and habitability of your home include:
- New roof and gutters
- New air conditioning unit
- Plumbing and electrical upgrades and replacement
- Minor kitchen and bath remodeling
- Flooring upgrades, including replacing carpet, tile or wood
- Weatherstripping and insulation
- New kitchen appliances or washer/dryer units
- Major landscaping work or site improvements
→ Structural alterations that add to the safety or energy efficiency of your home, such as:
- Mobile accessibility improvements (for residents with disabilities)
- Energy-efficient improvements
- Decks, patios or porches
- Septic or well system
- Basement completion or waterproofing
Poor uses of a home improvement loan with no equity
Before adding a wood deck or a sunroom, check out Remodeling magazine’s latest Cost vs. Value Report to see which home upgrades will get you the most bang for your renovation buck. You can save money if you avoid overpriced upgrades that won’t ultimately add value to your home.
Government-backed renovation loans typically prohibit the following home improvements for no-equity loans:
- Jacuzzi tubs
- Pools
- Room additions or add-ons
- Moving a load-bearing wall
- Barbecue pits, outdoor fireplaces or hearths
- Tennis courts
- Exterior additions, like a guest house or bathhouse
Alternatives to home improvement loans with no equity
Zero-interest credit card
If you have strong credit, you can get a 0% APR credit card with a long introductory period — typically up to 21 months. As long as you can pay off the renovation expenses you’ve charged to the card within that time frame, you’ll pay no interest. Just be sure you’re able to pull this off before you commit, since credit card APRs are usually sky-high.
Secured personal loan
Although personal loans are often unsecured, you can get a better APR if you’re willing to put up some collateral. Unlike with a mortgage or no-equity home improvement loan, that collateral doesn’t have to be your home. You can put up the money from a savings account or certificate of deposit (CD), a car or another asset.
Contractor financing
It’s sometimes possible to get financing for a renovation directly from your contractor, instead of a bank or traditional lender. These short-term loans are often called “same as cash” loans because, if you pay them off in time, you won’t have to pay any interest. But if you can’t pay the whole amount — within the short six to 12 months you’re often given — your interest charges can snowball quickly.
Home equity loans and HELOCs
Home equity loans and home equity lines of credit (HELOCs) are usually the cheapest way to borrow a large sum of money. They let you convert some of your home equity into cash at a lower interest rate than you can access with credit cards or personal loans. The big sticking point is that you’ll need to have a minimum amount of equity to qualify — usually 15%. But, if you’re relatively close to reaching that threshold, there are some actions you can take to get yourself over the hump.
Check out these steps to boost your home equity:
1. Pay extra on your mortgage each month
Adding one extra mortgage payment per year can take four years off of a 30-year loan term. Making biweekly payments will help you accomplish the same objective. Small changes can add up quickly, and every little bit helps grow your equity.
2. Refinance to a shorter, 15-year mortgage
If you can afford the larger payment, a 15-year mortgage will help you build equity much faster than a 30-year term. You’ll also pay less interest over the life of the loan.
3. Pay your principal down and recast your loan
Using a big bonus or unexpected cash windfall to pay down your loan is a good way to build equity quickly. You can also request a mortgage recast at the same time — this is when your lender recalculates your loan based on the reduced balance, giving you a new, lower payment.