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Home improvement loans can be tricky. It is hard to decide which loan is right for you when you are unsure how much the home improvements will cost, and how much value the improvements will add to your home. In fact, if you are in the market for a home improvement loan and you also don’t have a lot of spare cash, then you likely need to do quite a bit of planning and research before you begin talking with a lender or mortgage broker.

If you have little cash, then to obtain finance from a lender you will need to offer a sufficient amount of equity in some asset before they will consider lending you the money. Some of the key options are discussed below:

Equity in Your Own Home

This is one of the most common sources of equity to use as security on a home improvement loan, and there are two main ways you can tap into this. Firstly, if you had a sizeable deposit when you initially purchased the property (for example 25% or more), it is likely that your lender will use the existing “spare” equity as security for the loan. Secondly, if the value of the home has increased since you bought it, or you purchased it at below market value, again the “spare” equity may be sufficient. The best option for a lender will be the bank that has the existing mortgage on the property.

The Value Added by the Home Improvements

If you don’t already have sufficient equity in your home, then most lenders will provide home improvement finance based on the increase in value of the property resulting from the improvements.

This is a little trickier, however. Firstly, for the lender to use the added value, they want to be pretty confident of exactly how much value will be added. They will probably want a professional opinion from a valuer, which you will have to pay for. Before getting to this point, however, you should try and find a friendly local real estate agent and discuss what your home improvement plans are with him/her, and get their opinion on the value that will be added before you spend the money on the professional valuation.

You should also bear in mind that lenders will be less enthusiastic about lending to you for home improvements if you are doing a lot of the work yourself, as they will be less certain about the quality of the finished work, and also when it will be completed (do-it-yourselfers are notorious for underestimating the time needed for home improvement projects!). If most or all of the work is to be carried out by professional contractors, the lenders will be more comfortable. The may also require that the loan be paid out in stages once certain parts of the project are completed.

Other Sources of Security for the Loan

Many lenders will accept assets other than the home itself as collateral against the home improvement loan. For example, you could use the value of stocks that you own, or maybe a car or a business. While the value of your stock holding is easy to determine, the lenders will almost certainly require a written valuation on assets such as a car or a business.

Other Considerations

You need to be clear in your own mind what you are looking to achieve with your home improvements. The purpose may purely be to add value to the property, or you may be wanting to make it more livable for you and your family. Either way, if you have little cash to contribute to the project, it will be crucial to ensure that you will add more value to the property than the cost of the improvements.

In a tight financial situation, the advice of a good mortgage broker may be very worthwhile. As they are not the actual lender, they will be able to provide good advice on how to structure your loan application to increase its chances of success, before the application is presented to a lender.

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