How to Obtain a Loan for a Home Addition

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Obtaining a loan for a home addition is made easier if you can reliably predict that it will increase the value of the home itself sufficiently to make the loan a worthwhile investment. Certain homeowners may also qualify for a home improvement loan subsidized by the federal department of Housing and Urban Development (HUD) under the Section 203(k) program. Certain types of loans commonly used for financing home additions are also tax deductible, so it can be an effective use of discretionary funds.

  • Determine your eligibility for the HUD Section 203(k) program before seeking private loans to finance your home addition. Eligible homes must be at least one year old, conform to all relevant laws regarding construction, not be part of a co-op, and be a one to four family unit. The home must then be appraised by a HUD agent, which can take some time to occur. The home must also be owned and occupied by the borrower. To qualify for this program, the house has to be appraised and inspected multiple times before and after construction. These loans are time-intensive and potentially frustrating in terms of the bureaucracy you'll need to deal with, but the lower rates can make them attractive. Section 203(k) loans offer a low fixed interest rate over 15- to 30-year periods.

  • Ask for an independent home appraisal. Appraisers will estimate the current value of your home for tax and financial purposes. If you would like to increase the likely value of your home, clean it and organize it as much as you can. You may also hire a home stager to make your house look more attractive, which may increase the value that it will be appraised for.

  • Request that a construction contractor create a budget for the home addition you're attempting to get a loan for. Ask the contractor to create an estimate detailing how much he believes the addition will increase the home's value. If you can find another home similar what yours would be like with the addition, it will improve the accuracy of your estimate to note down its value.

  • Apply for a personal loan, home equity loan or home equity line of credit to finance your home addition. If you inform the bank that you will be using the loan to finance a home addition and show a budget for the construction, the lender may be more willing to finance it, as it will likely increase the value of the house. The interest you pay on home equity loans and lines of credit is tax deductible on up to $100,000 of the loan itself. Personal loans are not tax deductible. Offer to make a larger down payment on the loan if you would like to try to lock down a lower interest rate.

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