How do you get a home improvement loan when you have two strikes against you: poor credit history and no equity in your property?
No equity means that your mortgage balance exceeds the property’s value, and therefore, you cannot pledge collateral to secure a second loan.
Bad credit means that adverse payment history appears on your consumer report, hurting risk scores and causing lenders to decline most applications.
Four strategies might help: turn your financial hardship into an advantage, utilize an unusual no-credit-check option, tap into a vast network of subprime lenders, and apply for two government-supported loans.
Home Improvement Loans with Bad Credit
Your options are limited when seeking a home improvement loan with a bad credit history because lenders shy away from high-risk borrowers. Plus, you restrict yourself to unsecured contracts with no equity in the property, which have stricter approval requirements.
The best alternatives minimize the amount you must borrow, and financial hardship makes it easier to qualify for extra help.
Financial Assistance
Financial assistance programs are the ideal alternative to home improvement loans with a bad credit history. Families with no equity fare best when they reduce the amount they must borrow to spruce up their residence.
Low-income families should explore these options first.
Repair Assistance
Free home repair for low-income families is superior to bad credit home improvement loans. Keeping the projected monthly payments more affordable is critical when you already have adverse marks on your consumer report.
Charities, church-based ministries, and government programs minimize what you must spend.
Equipment Assistance
Free furnaces and air conditioning units beat poor credit home improvement loans every time. Why borrow money needlessly when financial hardship works in your favor?
Low-income families looking to replace aging energy-inefficient HVAC equipment might qualify under three government efforts that could combine to lower or eliminate the total cost of ownership and usage.
- Weatherization Assistance Program (WAP)
- Low Income Home Energy Assistance Program (LIHEAP)
- Energy Star (ES)
Appliance Assistance
Free government appliances surpass lousy credit home improvement loans less frequently. The same three programs designed to reduce energy consumption (WAP, LIHEAP, and ES) help more with refrigerators than washers, dryers, stoves, and dishwashers.
A refrigerator runs twenty-four hours per day, seven days per week, whereas the other appliances operate sporadically and consume less energy. Nevertheless, every penny counts when you have bad credit and cannot afford additional monthly payments.
No Credit Check
An unusual no-credit-check financing option works like a home improvement loan for bad credit borrowers with no equity. Better yet, it is interest-free and saves money!
You can use your Flexible Spending Account (FSA) to pay for medically necessary home alterations. For instance, some of these modifications might qualify.
- Replace carpeting with rigid flooring to facilitate movement
- Connect air conditioning to relieve severe breathing problems
- Lowering kitchen cabinets and other furniture
- Install ramps, railings, and support bars
Workers can use the entire sum in their FSA at the beginning of the year, regardless of whether they have made contributions beforehand. They can reimburse the advanced amount throughout the year by taking pre-tax deductions from their salary.
- Elect to fund your FSA during your employer’s annual open enrollment (November & December are most common)
- If an employer offers the program to a class of employees, it must permit all employees in that category to participate.
- Employers cannot check your credit report or consider your FICO® or Vantage® score.
- Schedule the project at the beginning of the plan year (typically January)
- Your employer must reimburse qualifying expenses immediately – per IRS requirements
- You have up to 52 weeks to repay the advance via pre-tax payroll deductions made during the plan year.
- Your employer cannot impose origination fees (an upfront percentage of the loan) or charge interest for using their money, as private lenders typically do.
- Better still, you repay the employer using pre-tax dollars, which reduce the amount of your income subject to three types of taxes.
Home Improvement Loans with No Equity
Your options are limited when seeking a home improvement loan with no equity in the property because you cannot pledge collateral. Plus, a bad credit history on your consumer report makes qualifying more challenging.
Unsecured loans are your only alternative. They rely on your signature promise to pay as “collateral” rather than the equity in your home – which you do not have.
Personal Loans
Personal loans are the obvious choice to fund an emergency home repair project with no equity because the contract is unsecured. Plus, subprime lenders specialize in working with consumers with bad credit histories on their consumer reports.
Personal loan approvals hinge on lender volume when your borrowing credentials are weak. Submit your credentials into a single online form so that a vast network of subprime companies can review your file simultaneously and respond quickly.
You need to play a numbers game.
Government Loans
Government-backed home improvement loans can sometimes help consumers with no equity and bad credit. Federal agencies back the unsecured loans, making it more appealing for private lenders to approve borrowers with weak credentials.
The government insures rather than issues loans to consumers. Therefore, your challenge becomes finding approved lenders for each program.
Title 1
The US Department of Housing and Urban Development (HUD) supports home repair loans that do not require equity as collateral. The Title 1 program insures up to $7,500 of unsecured contracts from private lenders.
You can use the borrowed money to “substantially protect or improve the basic livability or utility of the property.” The insurance makes it easier for consumers with low credit scores to qualify.
Begin with a list of HUD Title 1-approved lenders in your area.
Section 504
The United States Department of Agriculture (USDA) supports something better than home renovation loans for consumers with no equity. In addition, only those with bad credit qualify for the Section 504 program as the criteria require rejection of previous applications by private lenders.
You do not have to repay Section 504 grants. It is free government money. You could qualify for a $7,500 grant to remove health and safety hazards if you meet either of these criteria.
- Adjusted annual income up to 30% of the area median income
- Total debt service exceeding 46% of income
- Mortgage payments
- Real estate taxes
- Property insurance premiums
- Other monthly debt payments
Start the Section 504 application process at your local Rural Development office.
