What happens when your house is in desperate need of a major home improvement, but you get turned down for a bank loan? This is a frequent scenario we hear from homeowners and it leads to additional financial strain, especially if a delay postpones the repair or you make a hasty decision. Our counselors have gathered some possible options to consider before getting stressed or turning to a high-interest option, like a payday loan (which should be avoided at all costs).
First, let’s check out some options that don’t involve taking on new loans or debts.
Check with both your local municipality and county to see if there are any improvement programs available, such as grants or forgivable loans. While it may not cover the entire cost of the repair, it could make the financial shortfall smaller and the situation less stressful.
Local Nonprofit Resources
Contact your local United Way 2-1-1 or other social service agency to see if an Individual Development Account (IDA) is offered in your area. These programs are typically accompanied by financial education and offer a matched savings feature to income-qualified individuals. The income thresholds are often quite generous and the match is typically 1:1 or 2:1. If available, this option may help if you can postpone the home repair with a temporary fix or if it’s not critical, since you will need time to attend the program and save up the funds.
Many faith-based groups and community organizations provide help through emergency assistance programs (EAP). You can get connected to them by contacting United Way 2-1-1 and explaining your situation. Some of these programs are limited to select groups such as seniors, military, low-income with small children, etc.
In today’s world, you’d be surprised how many people are willing to contribute to help those in need. If your situation warrants it, and you have a compelling story and reason for why you need help, you could consider posting to a site like GoFundMe.
Other financing options
Now, let’s look at some alternative options.
This is certainly not an ideal option, but you could consider using an existing credit card with a limit high enough to cover the repair. Although credit cards often carry high interest rates, many creditors will negotiate a repayment plan if you can demonstrate a financial hardship once you have made the repair. This allows for lower rates and monthly payments in order to pay the debt back at more reasonable terms. It is not uncommon for creditors to lower the interest rate into the single-digits under a “hardship program.” Just be careful here and make sure you understand the terms of this arrangement and have them in writing. This should probably be one of the last options you consider.
Credit Union Loans
If you are a member of a credit union, or can join one, you’ll find that many offer small short-term loans to their members — even those with blemished credit. Because they are member-owned, some of these credit unions also offer free financial counseling and provide loans at lower interest rates.
Home Equity Line of Credit
Inquire with your current home loan servicer or a local bank or credit union to see if you have enough equity to finance the repair. A home equity line-of-credit may have a lower credit requirement than an unsecured loan since the home guarantees the loan.
Alternative and Peer-to-peer Lending Sources
If traditional banks aren’t much help, you can try some alternative sources, many of which have been popping up in recent years. Most of these require good credit, so keep that in mind. They may be more difficult to qualify for than traditional loans, but they also may have better terms. Here is a sampling of companies you might consider (some of which offer peer-to-peer lending): LendingTree, LendingClub, UpStart, MagnifyMoney, SoFi, PayOff and CircleBackLending.
To protect against this type of situation, you may want to evaluate your home warranty and/or homeowner’s insurance. Many homeowners receive a home warranty for the first year when they purchase a home and it may protect against most repairs. The decision to continue coverage of the warranty for the long-term can be a difficult one, though. While it’s nice to have protection, it comes at a cost. Homeowner’s insurance, however, is often required in the home buying process and is thought to be one of the best forms of insurance due to it’s low cost to benefit ratio.
Accounting for home maintenance and repairs is an important part of your personal financial plan. Nonprofit consumer credit counseling agencies such as Clearpoint can help you establish a budget to include emergency savings and improve your credit so you may be able to obtain loans in the future. Your counselor can even set up a debt management program with your creditors to pay off high credit card debt resulting from home repairs or other spending.
If you feel overwhelmed with home-ownership, the certified credit and housing counselors at Clearpoint can help. Call 800.750.2227 (CCCS) to speak with a counselor or get started online.