How to Finance a Garage or Shed

How Much Does It Cost to Build a Garage or Shed?

The cost to build a garage or shed varies a lot. The cost to build a garage ranges from $16,778 to $42,162, with the average landing at $29,470, according to Angi. For a shed, the cost ranges from $800 to $18,000, with the average sitting at $4,000.

Factors that can affect the cost of a garage or shed include:

• The contractor: If you're seeking a contractor for your project, their bids could vary widely. When choosing a contractor, be sure to consider not only the price but their experience and reputation.
• The type of garage or shed: Details such as the construction materials you select greatly impact the cost of this kind of project. For example, a shed made with wood might cost more than a shed made with metal. Also, a larger garage or shed could be pricier than a smaller one.
• Preparing the site: Clearing space for a garage or shed and laying the foundation add to the project's price tag.
• Construction permits: The place where you live likely will require getting a construction permit before work can begin. HomeGuide estimates the average garage permit runs $150 to $500, while the average permit for a shed can cost $50 to $145.
• Electrical and plumbing systems: If your garage or shed will include electrical or plumbing systems, you should expect the tab for your project to go up. HomeGuide says running electricity to a garage or shed could set you back anywhere from $500 to $7,500, depending on the amount of wiring and whether it's above ground or below ground.

How to Finance a Garage or Shed

If you're short on cash to pay for a garage or shed, which could cost tens of thousands of dollars, you can turn to several borrowing options to pay for the project. These options range from credit cards to various kinds of loans. Before diving into a garage or shed project, be sure to weigh the pros and cons of financing it.

Credit Card

A credit card might be a good option for financing a garage or shed, especially if you're buying a DIY kit from a home improvement store like Home Depot or Lowe's. You may be able to score a 0% financing offer if you use a store credit card and pay off the full balance within a certain period, such as 18 months. You might also consider a general credit card with a 0% introductory annual percentage rate (APR) offer.

Keep in mind that if you don't pay off the full balance within the given time window, your remaining balance typically will be hit with the normal APR, which is often in the double digits.

Home Equity Loan

Another option for financing a garage or shed is a home equity loan. A home equity loan is a second mortgage that enables you to borrow money based on how much equity you have in your home and then pay off the loan over time.

A home equity loan, which normally comes with a five- to 30-year payoff period, offers a fixed interest rate. This means your monthly payment stays the same throughout the life of the loan. You receive proceeds from the loan in a lump sum.

It's worth noting that you'll need to meet various lender requirements to qualify for a home equity loan. These requirements generally include:

• FICO^® Score^☉ of at least 680
• Strong debt payment history
• Debt-to-income ratio no higher than 43%

One cautionary note about taking out a home equity loan: Your home serves as collateral. So, if you default on the loan, the lender might foreclose on your home.

Learn more: Pros and Cons of Home Equity Loans

Home Equity Line of Credit (HELOC)

A HELOC is a second mortgage that offers yet another way to pay for a home garage or shed.

As with a home equity loan, your home serves as the collateral for a HELOC. But unlike a home equity loan, a HELOC lets you tap into a credit line rather than receiving cash in a lump sum. The credit line comes with a borrowing limit.

You generally can tap into a HELOC over a five- to 10-year span. Once this draw period ends, the clock starts ticking on paying off whatever you've borrowed. The payoff period normally lasts 20 years and comes with a variable interest rate, meaning your payments can fluctuate.

Cash-Out Refinance

With a cash-out refinance, you swap out your old mortgage for a new one. As opposed to a traditional refinance loan, a cash-out refinance loan allows you to dip into your home equity and come away with a lump sum of cash to pay for a garage or shed (or virtually anything you want).

One big drawback: A cash-out refinance causes the balance on the replacement loan to be higher than the balance on your current mortgage. You're also resetting the clock on your mortgage payments, meaning you could be signing up to make payments for up to 30 more years.

You usually need a FICO^® Score of at least 620 to qualify for a cash-out refinance. Plus, a lender likely will want your debt-to-income ratio to be under 50%.

Personal Loan

One financing option for a garage or shed that is not tied to your home's equity is a personal loan.

A personal loan enables you to borrow anywhere from a few hundred dollars to $100,000, depending on which lender you choose and your creditworthiness. Lenders usually don't require collateral for a personal loan.

The loan normally comes with a fixed APR. Overall, the APR can be roughly 8% to 36%, although some lenders might charge much higher interest rates.

To qualify for a personal loan, you often need fair or good credit. However, some lenders serve borrowers with bad credit. Your odds of getting approved for a personal loan will normally improve if your debt-to-income ratio is below 50%.

FHA 203(k) Loan

An FHA 203(k) loan is a lesser-known financing option. This U.S. Department of Housing and Urban Development (HUD) program lets you take out a long-term fixed-rate or adjustable-rate loan to rehab various property types. One of the projects permitted under the program insured by the Federal Housing Administration (FHA) is rehabilitating, improving or building a garage.

A borrower with a credit score above 580 is eligible for a maximum loan-to-value (LTV) ratio of 96.5%, meaning you can borrow up to 96.5% of your home's value. Borrowers with credit scores between 500 and 579 are limited to a maximum LTV ratio of 90%. Someone with a credit score below 500 isn't eligible for the program.

Depending on the kind of 203(k) loan, you might be able to borrow $75,000 or more.

Fannie Mae HomeStyle Renovation Loan

This program lets a borrower include financing for home improvements in a purchase or refinance transaction for an existing home. Proceeds from a Fannie Mae HomeStyle Renovation loan can go toward any type of renovation or repair, as long as the project is permanently affixed to your property. Renovations must be finished within 15 months of the loan closing.

This Fannie Mae program applies to 15- and 30-year fixed-rate loans and all eligible adjustable-rate loans. Fannie Mae says interest rates on these loans may be lower than HELOCs, personal loans and other financing options for projects like garages and sheds.

Fannie Mae notes that DIY financing can't exceed 10% of the value of the completed project. The lender may advance funds of up to 50% of the cost of materials after the loan closes to help homeowners find suppliers.

This type of Fannie Mae loan:

• Requires a minimum credit score of 620
• Comes with a maximum loan-to-value ratio of 97%
• Has no income limits

Freddie Mac CHOICERenovation Loan

A Freddie Mac CHOICERenovation loan lets a borrower finance a home purchase and renovation costs in a single transaction. This option is available for both fixed-rate and adjustable-rate purchase and refinance mortgages.

Loan proceeds covering up to 50% of material costs are available at closing. However, the proceeds generally can't go toward anything that isn't permanently attached to your home. So, you may be able to use proceeds to build an attached garage, but not an unattached shed.

In most cases, the maximum loan-to-value ratio for this loan is 95% for a single-family primary residence.

Pros and Cons of Financing a Garage or Shed

Financing a garage or shed comes with advantages and disadvantages.

Should You Use a Loan to Finance a Garage or Shed?

Although borrowing money to finance a garage or shed comes with some downsides, it can be a great investment in your home's value. It can be especially beneficial if you plan to use the structure to generate income—from a side business, for example—or are able to qualify for no- or low-interest financing.

Any costs associated with financing might be offset by the ROI you gain from the project.

If you've done the math and decided that financing a garage or shed isn't worthwhile, consider putting off the project so you can save enough money to pay for it.

The Bottom Line

Financing a new garage or shed for your home involves both risks and rewards. If you decide that applying for a loan is the way to go, check your FICO^® Score and credit report for free from Experian to see where you fall. If your credit could use some work to qualify for a low-interest financing option, take some time to make improvements before applying.