How to Get a Loan to Build a Garage

Building a new garage or undertaking a significant renovation can transform a home, providing added utility, storage, and often increasing property value. However, such projects represent a substantial financial commitment that many homeowners choose to finance rather than pay for entirely out of pocket. Understanding the various financing options available is the first step toward successfully funding your garage project. This guide explores different loan types, the information required for an application, the application process itself, and key financial considerations to help you navigate this important decision.

Types of Loans for Garage Construction or Renovation

Homeowners have several financing avenues when considering a garage construction or renovation, each with distinct features. These options leverage different aspects of your financial profile and project needs. The selection depends on factors such as the project’s scope, the amount of equity in your home, and your preference for fixed or variable interest rates.

Home Equity Loan

A home equity loan, sometimes referred to as a second mortgage, allows you to borrow a specific amount against the equity built in your home. This type of loan comes with a fixed interest rate and provides funds as a single lump sum, repaid over a set term with equal monthly payments. Your home serves as collateral, with the loan amount based on the difference between your home’s current market value and your outstanding mortgage balance.

Home Equity Line of Credit (HELOC)

A Home Equity Line of Credit (HELOC) functions like a revolving credit line, similar to a credit card, also secured by your home’s equity. With a HELOC, you are approved for a maximum credit limit and can draw funds as needed during a specified “draw period,” which lasts around 10 years. Interest rates on HELOCs are variable, fluctuating with market rates, and during the draw period, you may only be required to make interest-only payments.

Cash-Out Refinance

A cash-out refinance involves replacing your current mortgage with a new, larger mortgage. The difference between your existing mortgage balance and the new, larger loan amount is disbursed to you in cash at closing. This option allows you to access a portion of your home’s equity, up to 80% of its value, which can then be used to fund your garage project.

Personal Loan

For those who may not have sufficient home equity or prefer not to use their home as collateral, a personal loan can be an option. These loans are unsecured, meaning they do not require collateral, and are offered with fixed interest rates and shorter repayment terms compared to home equity products. Due to their unsecured nature, personal loan interest rates can be higher, with average rates for good credit ranging from 12.64% to 14.48%.

Construction Loan

A construction loan is designed for new construction or substantial renovation projects. Unlike other loans, funds are disbursed in stages, tied to the completion of specific construction milestones. This type of loan converts into a permanent mortgage once construction is complete. Construction loans are short-term, lasting about 12 months, and require detailed plans and contractor agreements.

Information Needed for a Loan Application

Preparing for a loan application involves gathering a set of personal, financial, and project-specific documents. Lenders require this information to assess your creditworthiness and ability to repay the loan. Having these details organized beforehand can streamline the application process.

Personal Financial Information

Lenders will require personal financial information, including proof of income. This involves providing recent pay stubs, W-2 forms from the past two years, and tax returns for the last two years. You will need to supply bank statements for the most recent two months to demonstrate consistent cash flow and adequate funds. Information on existing debts, such as credit card balances and auto loans, will be requested to calculate your debt-to-income ratio.

Credit History

Your credit history plays a role in loan approval and interest rate determination. Lenders will pull your credit report to evaluate your payment history, outstanding debts, and overall creditworthiness. It is advisable to review your own credit report for accuracy before applying, as a strong credit score leads to more favorable loan terms. Your credit score is a numerical representation of your credit risk, influencing the loan offers you receive.

Property Information

For loans secured by your home, such as home equity loans or cash-out refinances, property information is needed. This includes your property deed, recent mortgage statements, and an appraisal report. The property’s appraised value determines the available equity and the maximum loan amount you can borrow.

Project Details

Details about your garage project are needed. You will provide construction plans or renovation blueprints, itemized contractor estimates, and a project budget. This allows the lender to understand the loan’s purpose and verify the requested amount aligns with the project’s scope.

The Loan Application Process

Once all necessary information and documents are gathered, the loan application process proceeds through several stages. This approach ensures that lenders evaluate each application before making a lending decision. Understanding these steps can help manage expectations during this period.

Submission

The first step involves submitting your prepared application. This can be done online, in person at a bank or credit union, or via mail. After submission, you receive a confirmation, and the lender may make contact to acknowledge receipt and request clarifications.

Underwriting

Following submission, your application moves into the underwriting phase. Underwriting is the process where a lender assesses the risk of providing you with a loan by reviewing your financial information, credit history, and employment details. An underwriter ensures your financial profile aligns with the lender’s criteria for loan approval, examining income stability, assets, and existing debt. This phase can take several weeks, between 30 and 45 days for mortgage-related loans, and can involve requests for additional documentation if discrepancies arise.

Appraisal and Inspection

For secured loans, an appraisal of your property will be conducted to determine its current market value and confirm sufficient collateral for the loan. An inspection may also occur to assess the project’s feasibility and progress. These assessments help mitigate risk for the lender by ensuring the property supports the loan amount.

Decision and Closing

The lender communicates their decision regarding loan approval or denial. If approved, you will receive loan disclosure documents outlining the terms, interest rate, and repayment schedule. The final stage is the closing process, where you sign all legal documents, and the loan funds are disbursed. The method of disbursement can vary, as a lump sum or in installments, depending on the loan type and project agreement.

Key Financial Considerations for Garage Loans

Understanding the financial implications of a garage loan extends beyond just the principal amount borrowed. Several factors influence the total cost of borrowing and your repayment obligations. Evaluating these aspects is important for making an informed financial decision.

Interest Rates

Interest rates are a determinant of the total cost of your loan. Fixed interest rates offer predictable monthly payments throughout the loan term, providing stability, while variable rates can fluctuate with market conditions, leading to changing payment amounts. As of mid-2025, average home equity loan rates are 8.25% to 8.41% for fixed terms, whereas HELOC rates average around 8.26% and are variable. Personal loan rates, being unsecured, can range from 12.64% to 26.51% depending on creditworthiness.

Fees and Closing Costs

Beyond the interest rate, fees and closing costs contribute to the overall expense. Common fees include origination fees, which lenders charge for processing and underwriting the loan, ranging from 0.5% to 1% of the loan amount or a flat fee. Appraisal fees, between $300 and $450, are common for secured loans to determine property value. Other costs can include document preparation fees, attorney fees (ranging from $100 to $2,000), title insurance, and notary fees. For home equity products and cash-out refinances, total closing costs fall between 2% and 5% of the loan amount.

Repayment Terms

Repayment terms dictate how long you have to repay the loan and directly impact your monthly payment amount and the total interest paid over time. Shorter terms result in higher monthly payments but less total interest, while longer terms reduce monthly payments but increase the overall interest cost. Home equity loans have terms ranging from 5 to 30 years, while personal loans have shorter terms, between 3 to 5 years.

Total Cost of Borrowing

Consider the total cost of borrowing, which encompasses the principal, all accrued interest, and associated fees, rather than focusing solely on the monthly payment. This helps in understanding the financial commitment of the loan over its duration. While interest paid on a home equity loan used for home improvements may be tax deductible, it is advisable to consult a tax advisor for guidance.