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10 Ways to Get the Wrong Home Improvement Loan

10 Ways to Get the Wrong Home Improvement Loan

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Doing renovations? Home improvement loans are serious business, and the mistakes are costly. Here is a list of the Ten Ways to Get the Wrong Home Improvement Loan - and how to avoid making these mistakes.

Mistake #1 - Not Doing Your Math

There is nothing more disappointing than finding out that your dream renovations are way beyond your budget. So make sure that you do your math. It may seem tedious, but it's worth it in terms of both time and money. Pull out your financial information and take a long hard look. What is your income? What are your monthly and yearly expenses? How much discretionary income do you have? Depending on the renovations you're planning and how complicated they are, do a one-year and five-year projection.

Once you've done that, research and estimate the total cost of your home improvement project. This can be tricky. Renovation jobs involve hundreds of details, which means that there are just as many openings for increased expenses. Some factors that need to be included in your budget are design work, permits, appliances, utility hook-ups, lighting fixtures, loan fees and special insurance. If you foresee additional living expenses - rent money if you'll need to move out, or take-out meals if you're gutting your kitchen - then work these in, too. Leave yourself a contingency of at least 15% of the total projected cost (give or take, depending on the complexity of the job). This will help ensure your financial solvency, if and when you come up against unexpected expenses.

Mistake #2 - Not Checking Your Credit Rating

Get a copy of your credit report to know exactly what the lenders will see. You are eligible to get one free copy annually from each of the three major credit bureaus: Experian, TransUnion, and Equifax.

The loan rates you can obtain are directly proportionate to your credit score. The better your score, the better the rates. Experian's FICO score furnishes the real picture of the borrower's credit worthiness. The score evaluates overall credit balances and credit history of the borrower. FICO score ranges from 365 to 850. A credit score of 680 and above is considered a good score.

Mistake #3 - Not Shopping Around for Your Loan

There can be significant differences in interest rates and terms between various lenders. Generally speaking, interest rates are adjustable, but some banks and S&L's have fixed rates, too. Don't blindly assume that your bank is better. The loan department operates independently, and might not give you a break just because you bank with them. You should call at least six lenders in order to get a picture of the average rates in your area.

Mistake #4 - Neglecting to Find Out What Types of Improvements Qualify

Different lenders have different rules. For example, some home improvement loans are intended exclusively for remodelling (i.e. expansion projects), repairs (such as rusty pipes), or energy-related items (like heating) that are permanent in nature. In other words, they might not cover projects that are considered to be luxury additions or renovations such as decks, patios, fireplaces, saunas, landscaping, appliances or storage sheds/outbuildings.

Mistake #5 - Not Finding Out What Properties Qualify.

Generally speaking, most owner occupied properties are eligible for home improvement loans. However, some lenders stipulate that no more than 15% of the property be used for trade or business purposes. That means that if you have a home business, you need to make that clear. Otherwise, you might end up wasting a lot of precious time by finding out too late that your property doesn't qualify - and having to begin the process all over again.

Mistake #6 - Ignoring the Texas Homestead Law

This might be the most critical detail for you to be aware of. According to the Texas Homestead Law, the bank must make a record of its lien on the property before any work begins. That means that no materials should be purchased or actual work begun until the Mechanic's Lien and Deed of Trust have been fully taken care of by you and the contractor, and have been duly recorded.

The reason this is so important is that if materials are furnished or work performed before these documents have been recorded, it might invalidate the bank's lien - which, in turn, means that the bank will no longer be able to fund your loan. So save yourself the pain, and make sure that your contractor doesn't begin work or deliver any materials until the bank gives you the green light.

Mistake #7 - Not Finding Out the Difference between a Secured and Unsecured Loan

Secured loans use your home as collateral and offer lower interest rates than loans that are unsecured. Unlike many other types of credit, the interest paid on a secured home improvement loan is often 100% tax-deductible. Check with your tax advisor regarding the deductibility of interest. Additionally, on a secured loan, you may wait up to 6 months before your first loan payment. These are just two examples of the impact that these two types of loans can have on your financial situation.

Mistake #8 - Not Investigating Contractors Sufficiently

Keep in mind that the bank has no obligation to make sure that the contractor is using the money from the loan to pay for labor and materials. So double and triple-check a contractor before deciding to hire him. The bank will have to approve the contractor, so that saves you the headache of checking into his financial records. But it pays to ask for references, and to call as many of them as you can. If you've done all your homework and you still find yourself getting calls from sub-contractors and suppliers who haven't been paid, don't panic. Call your bank immediately. It can and will suspend additional advances on the loan until your contractor pays up.

Mistake #9 - Failing to Give Your Loan Officer all of the Information Needed in a Timely Manner

Without a complete picture of your financial position, a lender will not able to make a lending decision that is in your best interest. So, fill out the application completely. Don't be afraid to ask your loan officer for assistance.

Make sure to provide all documents as they are requested. Loan officers often have to chase after borrowers for all of the required information in order to complete their request. This is not only embarrassing; it will also extend the loan's processing time and possibly delay the closing.

Mistake #10 - Making Large Installment or Credit Purchases

Be careful not to purchase expensive items such as furniture, automobiles, or appliances, prior to closing. These purchases could change your financial picture, and may affect your ability to qualify for the home you want. If circumstances render such purchases necessary, check with your loan officer.

Bonus Mistake - Not Investigating an FHA (Federal Housing Authority) Home Improvement Loan

The FHA manages a government insured home improvement loan program. No appraisal is required, and you can qualify even if you have no equity in your home. This is especially helpful for people whose homes have devalued, or who have a poor credit rating, but is worth looking into regardless of your financial standing. The interest rates on FHA loans are fixed, and they offer up to 20 year terms.

Another advantage to FHA loans is the speed at which they can be obtained. A typical bank requires 30-45 days to approve a loan, whereas the FHA loans can be approved within a week to ten days. This timing can be crucial if you're looking for a loan to fix a leaky roof or septic system. Ask your lender about FHA Title One Home Improvement Loans.

Now that you are aware of the Ten Ways to Get the Wrong Home Improvement Loan, you can avoid them - and enjoy the excitement of remodeling your home.

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