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Home improvement loans are different from most other loan types by nature because there are often more variables and details to cover for most home improvement financing plans. While all banks and lending institutions are slightly different, most have a general set of instructions and steps you must follow to get approved for a home improvement loan. Don’t be afraid of a little paperwork! Most banks and lending institutions have gotten pretty good about limiting the amount of forms you have to fill out and steps you have to take. Here are the things you’ll need to cover when you apply for a loan in order to improve or add-on to your existing home:

Information You Need To Apply For A Home Improvement Loan

Your Home’s Equity: Most home improvement loans are secured loans, meaning they are at least partially based on the amount of collateral you have to offer to the bank. The most common form of collateral is the amount of equity, or extra value above the amount owed on your mortgage, that you have in your home. If you’ve been paying your mortgage for a number of years then you most likely have at least some equity, though the bursting of the housing bubble have left a record number of homeowners upside down on their mortgages. You can get an estimate of your home’s equity by using various home value estimation tools on the internet or you can simply look at the prices that some of the homes in your area recently sold for. Most banks will actually send out a professional home value estimator to look at your home’s exterior and interior before finalizing your home improvement financing. Obviously, if you have an upside-down mortgage, then equity won’t be a factor in your home improvement financing plan. In that case you may need to apply for a more unconventional unsecured home improvement loan.

Home Improvement Estimates: A lot of people go into the loan process with only a vague notion of how much money they need to complete the project. It’s difficult to get a loan from a bank without having a fairly specific list of how you’re going to use the money they give you. You’ll want to work with a contractor or the company that is going to be doing most of the work for this step. The more detailed your estimates, the better. Contractors will often be open to giving you several “levels” of quotes for different affordability options. If you were having your kitchen remodeled you might get a quote that includes stainless steel appliances and granite counter tops, one that includes standard appliances and standard counter tops and one that simply has builder’s grade materials. You may also want to use a home improvement interest calculator at this point to estimate interest rates loan terms, just so you have some idea of what to expect.

Neighborhood Comparatives: When you’re improving your home there is such a thing as “doing too much” to it. Generally, you want your home have the same features and square footage as most of the other homes in your area. Turning your home into a 5,000 square foot house when most of your neighbors only have 1,300 square feet may actually prevent your home from ever reaching it’s full potential in value. Whether you’re doing interior remodeling or putting an addition on your home, it will help if you can find some comparative examples of other houses in your neighborhood with the same or similar updates. Banks want to be sure that their money is being invested wisely and could warrant a return on their investment if they ever had to take over your property as a result of non-payment on your part.

Your Monthly Income: To pay back the loan you’re going to most likely need some proof of a steady income. Past paychecks will often work for this, though if you’re self-employed you may also need to provide copies of tax forms for the past several years so that your bank or lender will see that you have a viable business with steady income. If you’re just starting a business or if you’ve just change jobs you may have a more difficult time convincing a bank that you can afford to make regular payments. Along with your income it is often a good idea to have a current list of monthly expenses and bills on hand so that you can show that you have money to spare at the end of the month and you can afford a loan for your home improvements. Be sure to separate out any expenses you have already put towards you home improvement or any charges you have on a home improvement credit card. They can serve as proof that you’re serious about your home improvement project (as long as you can afford it).

The Application Process

Once you’ve gathered most of the above information you’ll want to begin shopping around for exactly where you will apply for a loan. The formal process of finding out your home’s equity is actually part of the loan application process, but you should still have some general estimates before you start working with a bank.

Talk To Your Lender: This should often be your first step, but it sometimes helps to have a lot of the other things in place anyway. Even if your specific lender doesn’t need everything listed above, it’s still a good idea to have most of them on hand just so you can make an informed decision about your home improvement financing options. You may decide that you don’t need a loan or that can’t afford one, based on the other pieces of information you’ve already compiled. If you haven’t decided upon a lender, then speak with each one to see what specifics each one requires. If you’ve already chosen where you’d like to apply for a loan, then speak with them or contact them and just make sure you know what paperwork is required. All lenders are slightly different and some may require a lot more documentation than others.

Your lender will also be able to properly determine if you qualify for a specialized loan package, such as an FHA home improvement loan or even a Veteran’s home improvement loan.

After you choose a lender the rest is relatively simple:

1. Sign contract with your lender for your home improvement loan.
2. Receive the agreed upon money from your lender. This usually comes in the form of a check either at the time of signing the contract or several days later through certified mail.
3. You will then hire your contractor and begin to pay him or her as needed. Do NOT pay in full until the job is 100% complete and to your liking. Continue to pay your contractor as your contract states, as long as the work is being done on schedule.
4. Begin to pay back the loan to the lending institution as needed. If you have a surplus of money from the home improvement coming in under budget or by borrowing too much you can either spend that money on additional upgrades or you can return it to the bank early, reducing the amount of interest you’ll need to pay.

Getting financing for a home improvement project or home addition can be a lengthy process with inspections and paperwork and various estimates all needing to be signed and sent to various parties. Some lenders can grant home improvement loans in just a few weeks, while others may take several months. It’s a good idea to plan far ahead in advance and let the contractors you’re working with know that your schedules may be dependent upon your ability to get the proper home financing in a timely manner.