Dreaming of a new kitchen or a backyard oasis but stuck with a credit score that’s less than stellar? You’re not alone. Many homeowners find the idea of getting a home improvement loan nerve-wracking, especially when their credit history is far from perfect.

However, a lower credit score doesn’t automatically disqualify you from getting a home improvement loan. Here, we’ll explore your options for realizing your home improvement dreams when your credit score may need some improvement itself.

Understanding Credit Scores and Their Impact on Lending

Before we get to the information on home improvement loans and financing for bad credit, let’s back up and make sure we’re on the same page regarding what credit scores really are and why they matter for home improvement loans.

What Exactly is a Credit Score?

Your credit score is a numerical expression representing your creditworthiness. Credit bureaus like Experian, Equifax, and TransUnion calculate these scores based on factors like:

  • Your payment history
  • How much debt you have 
  • Your credit history, or how long you’ve had credit
  • How much new credit you have
  • How many different types of credit you use

Why Does Your Credit Score Matter for Home Improvement Loans?

For home improvement loans, lenders view your credit score as an indicator of your financial health. A high credit score indicates that you’re a responsible borrower and are at a low risk of defaulting on your loan. A high credit score signals that lending to you isn’t risky for a bank. As a result, you could see lower interest rates, higher borrowing limits, and more flexible repayment terms.  Ultimately, a high credit score makes borrowing more affordable for you. 

On the other hand, a low credit score might raise red flags for lenders, indicating that they’re taking on a greater risk by lending to you. To compensate for that risk, they may give you higher interest rates, less favorable repayment terms, and possibly require you to secure the loan to your home or another asset. This means your assets are at risk if you default. A lower credit score makes borrowing more costly for you in the long term.

Common Types of Home Improvement Loans 

Good credit certainly makes getting home improvement loans easier, but bad credit doesn’t mean it’s impossible to get a home improvement loan. In the end, it often comes down to the specific type of loan you apply for. With that in mind, let’s take a closer look at a few popular types of home improvement financing.

1. Home Equity Loans: Home equity loans are ideal if you have significant equity in your home. They offer a lump sum at a fixed interest rate. Good credit can lower interest rates, but because home equity loans are secured against your house, you could qualify for a home equity loan with a credit score as low as 620.

2. Home Equity Line of Credit (HELOC): HELOCs work like a credit card against your home’s equity. They’re great for ongoing projects, giving you the flexibility to withdraw funds as needed. Like with home equity loans, HELOC rates are generally lower if you have good credit. But, also like home equity loans, they’re secured to your house, so you may be able to qualify for a HELOC with a credit score as low as 620. 

3. Personal Loans: Personal loans are unsecured, so they represent a greater risk for lenders. Therefore, expect higher interest rates than secured loans like HELOCs and home equity loans, particularly if your credit isn’t top-notch. Personal loans are faster to obtain and can be useful for both small and large projects, but remember to never borrow more than you can afford.

4. FHA 203(k) Rehab Loan: FHA rehab loans bundle your home purchase and renovation costs into a single loan. They’re especially useful if you’re buying a fixer-upper. FHA rehab loans have one of the lowest credit score requirements at just 500, but lenders may require you to have a higher score around 620.

Choosing the right home improvement loan is essential for setting yourself up for success. Understand that if you have bad credit, your loan may cost you more in the long term. Similarly, variable interest rates can dramatically change your monthly payments, so make sure you account for potential interest-rate shifts while budgeting.

How to Prepare for a Home Improvement Loan

Before applying for a home improvement loan, here are some steps to ensure you’re well-prepared:

  • Check and Improve Your Credit Score: Review your credit report for any inaccuracies and work on improving your score. Higher scores can make it easier to qualify, make borrowing more affordable, and lower your interest rate.
  • Create a Detailed Budget: Calculate the costs for your home improvement project. Consider contractor fees, materials, permits, and any unforeseen expenses.
  • Estimate Total Costs and Loan Amount: Determine how much money you need to borrow after factoring in your available funds and the comprehensive budget of the project. Keeping your total loan lower means you’ll spend less on interest in the long run.

Options for Home Improvement Loans with Bad Credit

As we mentioned, getting a home improvement loan with bad credit is challenging, but it’s not impossible. If you have bad credit, consider the following options:

  • Secured vs. Unsecured Loans: Because secured loans require collateral like home equity, they’re more accessible if you have bad credit. However, they’re also riskier, as defaulting on the loan could lead to losing your home. Unsecured loans don’t require collateral and that makes them more risky for lenders. As a result, they come with higher interest rates and less favorable terms.
  • Federal Programs: Programs like the FHA 203(k) and Title I loans offer options for low-credit borrowers to finance home improvements, sometimes without needing to use the home as collateral.
  • Community Banks and Credit Unions: These institutions often have more flexible criteria and may offer you better terms if you have bad credit. Compared to national banks, credit unions and community banks can make a more holistic assessment of your overall financial situation and account for factors that aren’t represented in your credit score.
  • SKYDAN’s Sale-Leaseback Solution: SKYDAN’s sale-leaseback solution lets you tap into your home’s equity even with bad credit, debt, and no income. Why? Because SKYDAN isn’t a bank — it’s a real estate investment firm. When you access the equity in your home with SKYDAN, there are no credit checks, no interest, and no added debt. Want to learn more about the alternative to home refinancing that’s give more homeowners access to their home equity? Jump to the end of the article for more details on SKYDAN’s sale-leaseback program. 

How to Improve Your Chances For Approval for a Home Improvement Loan

Improving your shot at getting traditional home improvement financing can involve several strategic steps:

  • Provide a Co-signer: Adding a co-signer with better credit can enhance your loan application by sharing the financial responsibility.
  • Choose a Secured Loan: A secured loan where you offer collateral usually comes with lower interest rates because they are less risky for lenders. Keep in mind that this is higher 
  • Increase Your Down Payment: A larger down payment reduces the loan-to-value ratio and shows lenders that you have significant skin in the game.

Proving that you have a stable income and can comfortably manage the loan repayments is also essential. Lenders will look at your income and your debt-to-income ratio to assess your repayment capacity.

SKYDAN Gets You the Cash You Need Without the Debt 

For too many homeowners, options for home improvements are out of reach due to lenders’  strict eligibility requirements. In this world where your options seem limited to expensive loans and additional debt, a residential sale leaseback program like SKYDAN’s can seem too good to be true.

It isn’t. As we mentioned, SKYDAN is different because we’re a real estate investment company — not a lender or a bank. That means we don’t care about:

  • Your income
  • Your credit score
  • Your payment history
  • Your debt-to-income ratio

All you need to qualify for SKYDAN’s program is equity in your home. Here’s how it works: 

  1. SKYDAN buys your home, but you don’t move out.
  2. You then agree to lease the home back from us at a mutually-agreed upon amount, not exceeding 2 years.
  3. Rent is deferred until the end of the agreement, meaning no monthly payment is due.
  4. You may then purchase the home back (original price + deferred rent) OR sell the property, at current market value, receiving all additional equity.

We know it sounds too good to be true, but don’t take our word for it; check out our reviews to see why our customers call us “the real deal.” And if you’re ready for more good news, see if you qualify today!