Types of Loans for Home Repairs

There are subcategories of these loans, which we explain below along with their pros and cons.

Personal Loan

If you have a good credit score, this is the best independent loan option for you. Such loans are offered by almost all lenders such as Jacaranda Finance and others. The processing time is quite fast, and some do not charge prepayment fees. While credit score is a key factor, lenders also consider your credit history to determine whether you can manage your finances well.

Minimum credit score: 620 or higher

Pros:

• No need to have home equity
• Quick access to funds
• Lenders may not charge application fees
• No risk of bankruptcy
• Loan amount is transferred directly to your account without extra questions
• Variable or fixed interest rates

Cons:

• Short repayment term
• High interest rates on the loan
• No federal protection or benefits for loans
• Taxes are deducted from interest payments

FHA 203(k) Loan for Damaged Homes

This loan is offered by the Federal Housing Administration (FHA) and is specifically designed for homes that require immediate repairs. If you recently purchased a home needing major renovations, add this loan to your mortgage and receive a large sum of money.

There are types of FHA 203(k) loans:

• Limited 203(k) loan for minor repairs
• Standard 203(k) loan for major renovations

Both of these loans have strict eligibility requirements and limitations. If the home was built within the last year, the loan can be used for its repair. However, if the property is now divided into 4 apartments and rented out, the loan cannot be used for its repair.

Minimum credit score: 500 or higher

Pros:

• Low down payment: 3.5%
• Federally guaranteed
• For older and damaged homes
• Variable or fixed rates
• Repairs can increase home value
• Variable or low interest rates
• No income limits
• Allows co-borrowers

Cons:

• If your credit score is below 500, you must pay more than 3.5% down payment
• Requires collateral
• Application and closing fees apply
• FHA approval required
• Repairs can only be done in primary residence
• Different loan limits depending on state
• Commercial and investment properties are not eligible
• Do-it-yourself repairs are prohibited
• Improvements like pools are not allowed

Home Equity Loans

A home equity loan is best suited for homeowners with high equity and stable income. One of the main advantages of this type of loan is its repayment term. You can repay the loan over 5 to 30 years.

A home equity loan can be used for various reasons beyond home repairs, such as medical expenses, debt consolidation, university tuition, etc.

Why do people rarely apply for such a loan?

As the name suggests, you must have significant equity in your home to qualify for a loan. However, the loan allows borrowing up to 95% of that equity. But there's one condition: the mortgage terms will change so you can manage two monthly payments; otherwise, your home may be seized.

Minimum credit score: 660 or higher

Pros:

• Monthly payments and fixed interest rates
• Larger loan amounts transferred directly to your account
• Lower rates compared to credit cards and personal loans
• Interest may or may not be tax-deductible
• No restrictions on how funds are used

Cons:

• Requires sufficient equity
• Risk of home foreclosure
• Initial costs for appraisal and application
• Requires steady income
• Requires good credit score
• Loan origination fee applies

You may wonder why we didn't mention credit cards. While they offer easy access to cash, the interest rate on credit card advances is 16%, making them one of the riskiest options.

Now that you understand your loan options, choosing the right one becomes easier. Be sure to select a loan that aligns with your ability to manage personal finances.