Getting a home improvement loan when you have little or no equity in your property is tough. But there are some options, albeit limited ones.
Generally, you're going to be looking at relatively modest financing for smaller projects, like upgrading a furnace, window replacements or adding a deck. You're not likely to get financing for a whole new kitchen or adding an extra room without at least some equity in the property.
FHA Title I program
For smaller projects though, one of the best options is the FHA Title I program. This allows homeowners to borrow up to $25,000 to finance basic home improvements - for example, new bathroom fixtures, kitchen cabinets and fixtures, a new roof and the like. It can't be used for luxury upgrades, such as a hot tub or outdoor carpeting, but can be used for certain lifestyle enhancements, such as a new patio or landscaping.
The catch here is that you need to have at least some amount of equity to borrow the full $25,000 - loans in that amount have to be secured by a mortgage or deed of trust on the property. However, loans of under $7,500 can be unsecured - meaning they're available to borrowers who are underwater on their mortgage.
True, you can't do a whole lot for $7,500, but it is enough to make some significant upgrades to a modest home - new windows and doors, for example, insulation, refinish hardwood floors, new appliances, etc. Larger projects, such as a bathroom upgrade are possible if you're willing and able to do some or all of the work yourself.
Manufactured home, energy efficiency options
You can also borrow up to $7,500 for improvements on a manufactured home on a non-permanent foundation, though manufactured homes that are permanently installed can qualify for the full $25,000, subject to equity restrictions. The FHA Title I program is also available to borrowers on land contracts and certain lease arrangements.
The Title I program also has a side program, called Powersaver, that provides loans of up to $25,000 for home energy efficiency improvements. However, those loans must be secured by a mortgage or deed of trust on the property, up to a maximum of 100 percent loan-to-value ratio of all loans secured by the property. However, your debt-to-income ratio can be as high as 45 percent, and you can qualify with a FICO score as low as 660.
Unsecured VA loans
If you're a qualifying veteran or servicemember, the VA allows you to borrow up to $6,000 unsecured for energy efficiency improvements. However, if you plan to borrow more than $3,000, you need to be able to demonstrate that the work you want to do will actually lower your energy bills.
Another FHA program is the 203(k) loan, which allows you to borrow up to $35,000 above the value of your home for home improvements. The loans are secured by the improved equity those improvements are expected to bring, so the upgrades would need to increase your property value by at least $35,000 in order to borrow that much.
The catch is that this loan is only available at the time you purchase the property - it's tied to your purchase mortgage. The only exception is if you made an all-cash purchase, in which case you can still obtain a 203(k) loan within six months of closing.
Credit cards, other unsecured loans
Another thing you can do is take out a straight-out unsecured loan to pay for home improvement projects. This approach typically works for amounts of up to $10,000, though you'll have to pay a significantly higher interest rate than you would on a secured loan - often 10 to 14 percent.
One way to take out an unsecured loan is simply through a credit card - either one from a bank or a home improvement store like Lowe's. You can then use the card to buy materials as you need them, and pay for the labor in cash.
Many banks also still offer low-interest cash advances on their credit cards, which can be a cheap way to borrow money if you're disciplined about it. Just be sure to use that card exclusively for the cash advance (don't pile up additional charges on top of it) and pay off the balance before the regular rate (often around 14 percent) kicks in.
But perhaps the most straightforward way to get an unsecured loan is through your contractor. Many contractors - particularly specialists such as window installers, heating and cooling companies, or roofing companies - offer low-cost or free financing if you pay off the bill within a year.
Just be aware that the cost of the financing will be reflected in what you're charged for the work - you'll likely pay more for the same job than you would if you paid for it out of a separate loan. But with many contractors eager for work these days, you maybe able to negotiate a good price for the overall package, including financing.