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How do you finance a home that needs repairs

Guest Post | Dec 7, 2021

Financing house repairs - How do you finance a home that needs repairs

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Having a comfortable home is one of the things we take for granted until all of a sudden it needs a repair. Repairs often happen at unfortunate times namely a broken furnace in the middle of winter. Reports show that 12% of Americans aren't prepared for an immediate cost of 400$ and every homeowner has to spend an average of almost $5000 on home repairs every year.

So how can you pay for such costs? If you have a pile of savings, that's okay. But on the condition that you don't have and you don't want to take a hit on your monthly budget; here are some ways you can finance a home repair.

Personal Loan

If you want to settle the issue with low risk then a personal loan can be your best option. Your credit determines if you are qualified for a personal loan and the interest rate you will pay. Better credit history and score may help you get a loan with a lower interest rate. A personal loan is often unsecured as sometimes it may not be backed by any collateral. Depending on the lender, you can borrow $1000 up to $100,000 from Banks, Credit Unions, or Online lenders. The main advantage of personal loans is that they are issued quickly, normally within a few days.

Home Equity Loans

Home equity loans are best suited for using your home value. You can borrow up to 85% of your home value through this excluding mortgages. In a normal sense, if your house is worth $400,000 and you have a remaining mortgage of $300,000; thus you can get up to an $85,000 loan. You will get a lump sum with a fixed interest rate to pay within 5 to 15 years.

You may consider taking this loan if you want to make a big change to your house like changing your roof. Otherwise, it's risky as you are using your house as collateral. If your loan gets defaults, you will lose your house in no time.

Home Equity Line of Credit (HELOC)

Home equity line of credit and home equity loan are similar as they both use the home as your collateral. But in HELOC instead of getting a lump sum, you use your home equity on your need basis. HELOC loan works in two stages. You can borrow as per your need during the loan period, paying interest on the amount you borrow. But you will have to pay the entire loan after hitting the maximum amount of loan you can borrow or your loan period ends. In a nutshell, HELOC works like a credit card.

FHA 203(k) Loan

FHA 203(k) loan can be used to buy and repair a fixer-upper(a home that needs repair) or to renovate your existing house. Its interest rate is higher than the general FHA mortgage.

You will need credit scores of at least 580 to get a 203k loan although a score of 620-640 is for some lenders. Besides, FHA demands a 3.5% down payment for a loan of up to 110% of your equity value after renovation.

The main benefit of a 203k loan is it offers lower interest rates than personal loans or credit cards. But if you need quick cash then 203k mightn't be your best option as it requires some time to do the paperwork.

FHA Title 1 Loan

FHA Title 1 loan is also backed by the federal housing administration. If you need a small renovation or quick repair, a title 1 loan can help you borrow up to $7500. It is an unsecured loan.  You will require a debt-to-income ratio 0f 45% or less to be eligible for an FHA Title 1 loan and you must live in it for at least 3 months if the property is a residence.  The advantage of it is that no minimum credit score is required and the interest rate is usually low.

Alternatives to Home Repair Loans

Cash-out Refinancing

Cash-out refinancing allows you to take advantage of your home equity by replacing your home loan with a bigger mortgage. It can be a clever move if you can lower the interest on your primary mortgage and make the best use of the funds.

Reverse Mortgage 

A reverse mortgage allows homeowners ages 62 and older to take a lump sum or a line of credit against their home equity. But unlike mortgages in which the lenders take payments from the homeowner; in a reverse mortgage, the homeowner takes the payment from the lender.

Credit Cards

You may get a loan from a credit card with a 0% introductory interest if you have good credit. It can be beneficial to be the use of minor repairs. If you can clear the loan within 12 to 18 months then there won't be any interest charged. For bigger repair, you shouldn't consider taking a loan with credit cards as if you fail to clear the loan within introductory periods, you may end up paying 15% APR which is an average of every credit card available.

If you are a homeowner then home repairs are inevitable. The best way to avoid taking any kind of home repair loan is to be prepared. House consultants advise saving 1% of your house equity for unexpected repairs.

If you want good consultancy and more information about financing home repair, visit reliabledp.com


NCFA Jan 2018 resize - How do you finance a home that needs repairs The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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