Learn About Home Improvement Loans from Private Money Lenders
Many borrowers simply cannot comply with the requirements of banks or credit unions to get approved for home improvement loans. Whether it be a factor of too low a credit score, or not enough monthly income, many borrowers of home improvement loans are turned away by their banks and credit unions.
Some banks and credit unions scrutinize these loans more because they are 2nd position loans and pose a higher risk. And when banks and credit unions do make home improvement loans, they are often at very high interest rates.
Home improvement loans, sometimes called home equity loans, are intended to increase the value of a residential property through improvements, renovations, or repairs.
Home improvement loans can either be structured as a line of credit behind a first mortgage, or they can be a 2nd mortgage. What’s the difference between a line of credit and a 2nd mortgage?
With a line of credit, a borrower only pays interest on the amount of funds borrowed from the line of credit. For example if you take a home improvement loan as a line of credit for $100,000 and you only take out $25,000 at a time for property improvements, you only pay interest on what you’ve taken out. The lender will typically give the borrower funds in disbursements or “draws,” as the improvements are completed, rather than just give the borrower all of the funds in one lump sum.
With a 2nd mortgage loan, the lender gives the borrower the entire amount of the loan on the day it is borrowed in one lump sum, and the borrower pays interest on the entire loan amount from the day it is borrowed. For example, if you borrow $100,000 for home improvements, with a 2nd mortgage, the lender will give you the entire $100,000 loan all at once, whether or not you are using all of the funds on the home improvements right away or not.
Many people are seeking home improvement loans to utilize some of the equity that they have built up in their homes over time. Also, the strong real estate market between the years of 2010 to 2018 has helped in building that equity for many homeowners.
Because home improvement loans tend to smaller-sized loans behind a larger first mortgage, home improvement loans are higher interest rate loans. Because they are usually 2nd position loans, e.g. loans behind a first mortgage on a property, these loans pose a higher risk to a lender. Because the first mortgage lender can foreclose and wipe out any 2nd position lenders, many lenders are hesitant to make a loan in a second position behind a 1st mortgage. For this reason, home improvement loans tend to come with a much higher interest rate than a traditional first mortgage loan.
Many lenders can be incentivized to make home improvement loans if they perceive that, by making improvements to a property it will increase it’s overall value, thus improving their overall value position in the mortgage.
Banks and credit unions go in cycles in terms of lending for home improvement loans. At one time they are advertising heavily to make home improvement loans, and then suddenly, they are no longer making these loans anymore or their requirements become more stringent for qualification.
The unpredictability of the banks and credit unions draws borrowers to private money lenders for home improvement loans. Private money lenders tend to make faster lending decisions than banks and have far less documentation requirements than traditional lenders. In terms of pricing, e.g interest rates and fees, private money loans are not that much higher in cost as compared with home improvement loans from banks or credit unions.
Private money loans are growing in popularity as a source of home improvement loans. In fact, one of the largest mortgage lenders in the U.S. at the time this article is written is “Quicken Loans,” which is a private money lender. By definition, a private money lender is any lender that is not a depository institution such as a bank or credit union.
Private money lenders, often called hard money lenders, or bridge lenders are one of the best sources of home improvement loans because they base their lending decisions on the asset rather than the credit or income of the borrower. Private money lenders are also very fast to qualify borrowers and fund their loans, often in a matter of a week or so. Conversely, a bank or credit union may take three to four weeks to qualify borrowers and fund their loans.
Borrowers often seek lenders with the least requirements and the fastest speed of funding, and for this reason, many borrowers are now turning to private money lenders for home improvements loans. For more information about the approval requirements of private money lenders watch this short video, “What You Need to Get Approved for a Private Money Loan.”