Published: April 01, 1995

Financing Home Repairs

A fact sheet that lists several different ways to finance repairs and improvements to your home, such as "FHA Title I Home Improvement Loans" and "Lien Contracts."

Note: Last revision 1995. Use this information as a general guide only; consult with a local consumer group for laws specific to your state.

FINANCING HOME REPAIRS

There are many different ways to finance repairs and improvements to your home. The following information summarizing the most common of these methods is provided to help you chose the best method of financing repairs or improvements to your home.

PERSONAL LOANS

Personal loans are usually for a relatively small amount (from a few hundred to a few thousand dollars) obtained from a bank, finance company or credit union and do not involve a lien on your home or property. Some form of collateral is usually required, such as a savings account. If you default on the loan, the lender will place a hold on the funds in the savings account. Personal loans are "unsecured" loans. Interest rates are generally higher and the time for repayment is usually shorter than with a "secured" loan, but no lien will be placed against your property.

Some life insurance policies, annuities and retirement plans allow you to obtain a loan of a portion of your equity at a very low interest rate. The face value is then reduced by the amount of the loan until you repay. Many bank credit cards will also allow you to obtain a cash advance. However, even though there will not be a lien against your property, you will pay high credit card interest rates, some as high as 19-20%.

FHA TITLE I HOME IMPROVEMENT LOANS

The Federal Housing Administration (FHA) of the U.S. Department of Housing and Urban Development, insures certain home improvement loans. The loan is obtained from a private lender, but FHA insures repayment of up to 90% of the loan. Amounts under $7,500 do not require a lien against your property. FHA will not insure loans for swimming pools or burglar alarms, but will insure loans for remodeling, room additions and plumbing, electrical or heating repairs. FHA loans do not have a prepayment penalty.

CAL-VET LOANS

The California Department of Veterans Affairs makes loans directly to qualified veterans. Borrowers must have entered the service as permanent residents of California during a war time period and must have spent at least 90 days in active duty. The terms of CAL-VET loans vary according to agency funding and current legislation.

LIEN CONTRACTS

Some contractors have arrangements with lending institutions which allow the contractor to offer home improvement. The lending institution agrees to purchase the contracts of qualified borrowers. The contractor will ask you to fill out a credit application. If the lending institution approves your application, it will purchase your contract from the contractor by paying the amount charged by the contractor to perform the work. You pay the lending institution back directly in installment payments, or the lending institution may sell the contract to a third party. Lien contracts involve the placing of a lien or deed of trust against your home or property so that if you default, the lender can foreclose on your property and sell it at a public auction to collect what it is owed. If this happens, the home or property owner rarely receives anything from the sale no matter how small the debt and all his/her equity in the home or property will be lost.

NEVER sign a Lien Contract or any other document unless you completely understand all its terms. Watch out for contracts which contain a balloon payment (low interest-only monthly payments for several months or years and then a large payment of the principal in full). All Lien Contracts must contain a statement of the full cash price, down payment, amount financed, interest rate and finance charge, amount and dates of periodic payments, total payments and total deferred payment price. They must also contain a written notice of your right to cancel the contract within three (3) days.

HOME EQUITY LOANS

These loans are secured by a deed of trust against your home or property. Interest rates are usually high because you are using the equity in your home and not your credit to obtain the loan. If you are not careful, you could agree to terms you cannot afford, such as monthly payments higher than your monthly income and high loan fees or "points" (1 "point" is generally 1% of the total loan amount). Large banks usually charge 2-5 points, while some "hard money" lenders (brokers, small or independent finance companies or middlemen) charge 10-20 points (10-20% of the loan). WATCH OUT FOR THESE!

THE COMMUNITY REINVESTMENT ACT

The Community Reinvestment Act requires financial and lending institutions to meet the credit and banking needs of all the communities in their service area, including low income and minority communities. There may be special funds or loan programs available to low and moderate income individuals in certain areas. Contact the Federal Home Loan Bank of San Francisco, 600 California Street, San Francisco 94108, (415) 616-1000, (415) 616-2626 (fax) for more information.

FINAL WARNING!

Once you obtain financing, make sure money is paid out to the contractor only for work that has been fully completed or require a performance bond. Find out whether taking out the loan and making the improvements to your home will cause your property taxes to be raised. PLAY IT SAFE - have Legal Aid or another attorney review and explain all papers to you BEFORE you sign.

© Copyright 1995 Legal Aid Foundation of Los Angeles

Produced by Consumer Action

Electronic publication funded by BACEF.

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Keywords

Home Repair, Housing, Cal-vet Loans, Lien Contracts, Home Equity Loans

Sponsors

Bank of America Consumer Education Fund (BACEF)

Notes

Category

Housing   ♦   Home Repair   ♦  

Copyright

© 1995 Consumer Action. Rights Reserved.