How to Get a Home Improvement Loan When You Have Little to No Equity

If your home needs renovations but you don’t have much equity built up yet, you still have options for financing the projects. While traditional home equity loans or lines of credit require 15-20% equity, there are specialized loan programs that allow you to borrow against your home even with minimal equity – or none at all.

Getting approved for a home improvement loan with little to no equity takes some extra legwork You’ll likely need strong credit and steady income to qualify And if you do find a lender willing to work with you, the loan terms may not be as favorable as if you had more equity. But in many cases, a higher interest rate or fees are worth it for critical home repairs.

Here’s what you need to know about tapping into your home’s value when you don’t have the typical 20% equity cushion.

What is Home Equity and How Much Do You Need for a Loan?

Your home equity is the current market value of the home minus any outstanding mortgage debt For example, if your home is worth $300,000 and you owe $240,000 on your mortgage, your equity is $60,000.

Lenders typically want to see you have at least 15-20% equity before they’ll approve you for a home equity installment loan or line of credit (HELOC). With less than that, you’re considered to be in a high loan-to-value position, which makes underwriting riskier for the lender.

Borrowers with minimal equity are more likely to default on home equity loans when home values decline or life circumstances change. If the borrower defaults, there may not be enough equity cushion to absorb losses if the lender has to foreclose and sell the home.

Low-Equity Loan Options for Home Improvements

If you need to finance home renovations but don’t meet the 20% equity threshold for a HELOC or home equity loan, you still have alternatives. Here are some of the most common types of financing for homeowners with less than 20% equity:

FHA Title I Home Improvement Loan

One major option is the Federal Housing Administration’s (FHA) Title I program. Title I loans can be used to make necessary home repairs and improvements for single-family homes.

Key Features:

• Loan amounts up to $25,000
• Down payment not required
• Fixed interest rates
• Loan terms up to 20 years

Title I loans are beneficial because they’re backed by the federal government. So underwriting is a bit more lenient than conventional loans.

You don’t need a minimum credit score or down payment to qualify. The program is targeted at low- to moderate-income borrowers. Income limits vary by area, but maximum household income caps nationwide typically range from $60,000 to $112,000.

On the downside, Title I loans can only be used for certain necessary repairs and improvements to make the home livable or energy efficient. You can’t use the funds for luxury renovations like swimming pools. Cosmetic-only projects like kitchen cabinet resurfacing are also off the table.

FHA 203(k) Rehab Mortgage

The FHA 203(k) mortgage is another government-backed option that combines a home purchase or refinance with a renovation loan. It allows you to roll the financing for both transactions into one mortgage.

There are two versions of the 203(k) loan:

• Standard 203(k): For major renovations where structural changes are needed. Requires a third-party consultant to review/approve the work.
• Limited 203(k): For minor renovations up to $35,000 that don’t require structural changes.

Key Features of 203(k) Loans:

• Down payments as low as 3.5%
• Loan amounts up to $625,500 in most areas
• Credit scores as low as 500 with 10% down
• All renovations must be completed within 6 months

A major perk of the 203(k) is that it allows lower credit scores and down payments than conventional loans. You can qualify with a 500 credit score if you put down 10%. With just 3.5% down, the minimum credit score is 580.

Using a 203(k) to purchase and rehab a home in one transaction can save time and headaches compared to buying first and getting separate financing later. You’ll also likely get a better interest rate than alternatives like credit cards or personal loans.

VA Renovation Loans

If you served in the military, VA home loans can be used to buy and remodel a home in one shot. VA renovation loans don’t require a down payment or minimum credit score.

You can finance up to 100% of the as-completed value of the home. So if you buy a home for $250,000 and plan renovations costing $50,000, you could potentially borrow the full $300,000 completed value.

The project must be completed within six months. And you’ll need to use a licensed contractor approved by the VA. But it provides flexible financing options for eligible veterans.

Fannie Mae HomeStyle Renovation

The Fannie Mae HomeStyle Renovation program is a conventional loan that requires a slightly higher credit score and down payment than government programs. But it still offers more flexibility than a typical 20% equity home equity loan.

Key Features:

• Down payments as low as 3%
• Minimum credit score of 620
• Loan amounts up to $647,200 in most areas
• Option to do some DIY repairs
• 12 months to complete renovations

While HomeStyle Renovation mortgages have stricter criteria than FHA or VA loans, they provide wider flexibility. You can use the funds to make virtually any kind of home improvement except for complete teardowns. Cosmetic upgrades like new floors, kitchens, and bathrooms are fair game.

HomeStyle loans are also unique because they allow some DIY repairs. Up to 10% of the loan can go toward homeowner-completed work.

Unsecured Personal Loans

Personal loans allow you to borrow money for any purpose without pledging your home as collateral. The loans are repaid in fixed monthly installments over 2 to 7 years.

Interest rates on personal loans for home improvements tend to be higher than secured options – often 10-36%. But they can be funded quicker, sometimes within just 1-7 days of applying.

Key Features:

• No home collateral required
• Borrow $1,000 to $100,000+
• Fixed rates and terms up to 7 years
• Funds available fast if you qualify

While unsecured, personal loan qualifications are stricter than some secured loans. You’ll generally need good to excellent credit (scores of 670+) to get approved and the best rates. Debt-to-income ratios below 40% also help.

The convenience and speed of personal loans make them best for smaller home projects or emergencies. For major renovations, secured low-equity mortgage products often provide cheaper financing.

What Kinds of Home Improvements Can You Make?

Most low- and no-equity home improvement loans put some limitations on how you can use the money:

• FHA Title I – Only certain “necessary” repairs allowed. No luxury projects.
• FHA 203(k) – Wider range of repairs allowed but still no purely cosmetic upgrades.
• VA – Improvements must align with what’s “ordinarily found” in homes in your area.
• HomeStyle – Very flexible, but not for total teardowns/rebuilds.
• Personal Loans – Can be used for any legal purpose.

So before applying, read the fine print and make sure the program matches your intended project. Some examples of commonly approved renovations:

• Roof replacement
• HVAC installation or upgrades
• Plumbing and electrical repairs
• Adding insulation
• Major landscaping projects
• Kitchen or bathroom remodels
• Window replacement
• Flooring installation or refinishing
• Building wheelchair ramps or stair lifts

Purely cosmetic projects like cabinet refacing may be limited or prohibited, depending on the loan program. Luxury add-ons like pools are also typically off the table.

What Are the Qualification Requirements?

While low- and no-equity loans allow more flexibility, you’ll still need to meet certain criteria to get approved and get the best rates.

Credit Score: FHA programs allow scores as low as 500. VA has no minimum. HomeStyle requires 620+ for the best pricing. Personal loans typically need 670+ scores.

Income: Enough steady income to afford the new monthly payment is key. Many lenders want debt-to-income (DTI) below 50%.

Home Value: There are appraisal requirements. The after-improvement value must be sufficient to support the new loan amount.

Equity: The specific equity minimum depends on the program. FHA and VA allow 100% financing. HomeStyle requires just 3% equity.

Down Payment: Not always required but can help you get approved and better rates. FHA allows down payments as low as 3.5%.