Does my project qualify for a home improvement loan?

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A home improvement project is often worth taking out a loan for. It’s an investment not only in the value of the property but also your enjoyment of it.

However, if you have bad credit, you may think you won’t be able to modernize your kitchen or add that new porch. Don’t give up hope. There are ways to obtain home improvement loans with bad credit or to put yourself in a position to get the loan you want.

Home Equity Loan or Home Equity Line of Credit (HELOC)

If you have equity in your home, you can use it to finance your project. You can generally borrow 80 percent of its current value. For example, if your house is worth $250,000, the total of your loans against it can be $200,000. If your first mortgage is $150,000, there’s another $50,000 you might be able to borrow for your project.

To qualify for a home equity loan, you usually need a FICO credit score of at least 620 and a debt-to-income ratio (DTI) close to 40 percent. DTI compares your income to your minimum payments on mortgage, car loan, credit cards and other loans. If you make $5,000 a month, your monthly payments (including the loan you’re applying for) can’t be much more than $2,000.

These aren’t hard and fast numbers. Some lenders may be more flexible.

Another option is cash out refinancing, where you replace your first mortgage with a new mortgage for that amount plus the amount you want for your project. If interest rates have dropped since you first bought this may be easier to qualify for.

Other options are to borrow from your 401K or find a friend or relative who will cosign. Sometimes loans not secured by your home are available, but the terms are likely to be unfavorable if your credit is weak.

Improve Your Credit Score

The best option may be to delay your project for at least six months while you work to improve your credit score. How can you do that?

The more important factor: always pay your bills on time. Bill payment makes up over a third of the score. If you have trouble doing this, talk to your creditors or a credit counselor. Even if it doesn’t boost your score right away, the advice you receive may help going forward.

The second biggest factor is utilization rate: what you actually owe on a card compared to credit limit. If you can pay high-utilization cards to under 30 percent of the max your score will improve. Don’t move debt around by paying one card with another. That won’t help.

Length of credit history matters. Leave old cards open even after you’ve paid them off. Avoid applying for new cards or new loans.

Finally, check your credit report. If anything looks wrong, report it to the credit agency and to the bank, lender or card company that provided bad information. Make sure your score is fair!

Even if you have to delay or scale down your home improvement project, taking charge of your FICO score will pay off with a lifetime of financial benefits!

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