Home Improvement Financing, Contract Specifications and Contractor Certification

Home Improvement Financing

You will need to create a budget for your remodeling project that will not put a strain on your finances. Consider whether your project makes sense given your present situation. Your budget should not exceed 30% of your home’s value.

You have several options for home improvement financing:

Renovation/Construction Loan: This loan is based on the appraised value of the completed project. The appraisal is done on your current home together with the contractor’s plans and specifications and a cost basis for the renovation. This interest-only loan can be modified or refinanced into a new permanent loan upon project completion.

Cash-Out Refinance: If you have a higher rate for your first mortgage, this is a very good option for home improvement financing. You can finance your project by refinancing the first mortgage to a lower rate and get out additional equity. It’s advisable not to go over 80% of the appraised value of the home. A home equity line of credit or a second mortgage can be added if more funding is needed.

Home Equity Line of Credit (HELOC): A HELOC is an interest-only loan on the excess equity in the home, over and above the first mortgage. The money can be used for anything, even renovation costs, and can be as large as 100% of your home’s current value.

Second Mortgage: This method of home improvement financing is similar to the HELOC except that it is a fixed rate loan. Both interest and principal are included in your monthly payment, and all funds are dispersed after the closing.

Contract Specifications

The contract should include at least the following:

• Project specifications: Project location, job timetable and price, fee structure, materials list and scope of work
• Details of each party’s responsibilities (e.g. protection of personal property around the job site, provision of materials for the project)
• Change process description (documentation and handling of project changes, credits for cancelled work, payment for additional costs)
• Discussion of how disputes will be resolved
• Description of the parties involved, which should include all contact information
• Financial terms (fixed vs. cost-plus contract, payment method and schedule)
• Termination agreement
• Clause addressing natural disasters, severe weather of other events that can cause damage or delay
• Contractor’s warranty
• Discussion of contractor affidavits and lien releases, or alternatively, a statement providing homeowner protection against placement of a lien on the property by subcontractors if payment is not made

It is advisable to have a lawyer review your contract before signing it. Choose an attorney who has experience with building or remodeling contracts.

Verify Certification

Although it may not be required by your state of residence, certification can help you determine if your contractor is qualified. The following associations offer certification:

National Kitchen and Bath Association: Offers kitchen and bath design certification based on industry experience and written examinations.

National Association of Home Builders: The Remodelers Council offers graduate education in extensive business, customer and technical skills. The Graduate Remodeler certification takes more than two years on average to complete.

National Association of the Remodeling Industry: Offers a certification program for contractors that demonstrate a high level of ethical standards and competency.