You may never have heard of them, but an FHA Title 1 loan is a financial product you can use to cover the costs of home renovations, repairs and improvements. The Department of Housing and Urban Development (HUD), the agency that oversees the Federal Housing Administration (FHA), makes it easier for homeowners to finance improvements to their homes by insuring lenders against loss on the property improvement loans they issue.
Here’s how it works. If a private lender issues you a Title 1 loan and you fail to pay the loan back, FHA reimburses the lender for up to 90% of the amount you borrowed. As a result, many lenders are willing to lend money to homeowners who might not otherwise qualify for home renovation financing.
The FHA Title 1 loan can be used for a variety of home improvements, both large and small. According to HUD, “FHA-Insured Title 1 loans may be used for any improvements that will make your home basically more livable and useful.”
There is, however, a small catch. You cannot use the loan to pay for “luxury additions.” This may include hot tubs, swimming pools and outdoor fireplaces. You also can’t use the loan to pay for work that has already been completed.
FHA Title 1 loan requirements
One of the reasons the Title 1 loan can be so attractive is that it may be easier to qualify for when compared with many other home improvement financing options.
Considering a Title 1 loan to finance your home improvement project? Here are some of the requirements you’ll need to satisfy in order to qualify:
- You must have occupied the home you wish to improve for at least 90 days.
- There is no minimum credit score requirement set forth by HUD or the FHA to qualify for the loan. But private lenders who issue FHA Title 1 loans may opt to include a minimum credit score requirement of their own.
- Loans over $7,500 need to be secured with a deed of trust or mortgage.
- Your debt-to-income ratio (DTI) cannot be higher than 45%. DTI is a measurement of your monthly debt obligations compared to your monthly pretax income.
- There is no income requirement to qualify.
Benefits of using an FHA Title 1 loan for home improvements
Your home is an investment. Taking proper care of your asset can pay off, both in terms of your comfort and in the potential to increase the value of your property.
In an ideal world, you would have enough money saved up in advance to pay cash for home improvements. After all, that can help you to avoid interest fees and stretch your money further. Yet covering home renovations or repairs with cash isn’t always a realistic option.
If your plumbing is broken, for example, and insurance won’t cover the repairs, you need to find a quick solution. The fact that you might not be prepared with an emergency fund to cover the costs of repairs doesn’t change the fact that the repairs still need be completed — sooner rather than later.
Putting off repairs while you save up money for materials and labor probably isn’t a good choice (or even an option). However, racking up a bunch of debt on your credit cards to cover repair expenses isn’t wise either.
The FHA Title 1 loan can offer homeowners an inexpensive alternative to finance home renovations when paying cash isn’t feasible. Even if you aren’t financing emergency repairs, borrowing money to improve your home could be a good investment. This may be especially true if the renovations increase the value of your property.
Here are a few benefits of using an FHA Title 1 loan to finance your home renovations:
- Low fixed-interest-rate on a Title 1 loan usually makes it a smarter option than using a home equity loan, a home equity line of credit, or credit cards to finance your home repairs and improvements. (Note, rates may vary between lenders. You can negotiate with your lender about the interest rate. )
- The loan can be used to improve a manufactured home.
- No equity? No problem. You do not have to have equity in your home to qualify for an FHA Title 1 loan.
- There is no prepayment penalty if you choose to pay off the loan early.
- You can borrow up to $25,000, if qualified, to improve a single-family home.
- Loans under $7,500 seldom need to be secured with an asset other than your signature.
Another benefit of the FHA Title 1 loan is the fact that you may be able to combine it with another financial product known as the 203(k) Rehabilitation Mortgage.
The 203(k) Rehabilitation Mortgage combines a first mortgage with funding for renovations. So, if you’re interested in buying a fixer-upper, you might be able to get a mortgage plus a Title 1 loan for home improvements together into a single loan. (To be eligible, you must qualify for both types of financing.)
Loan limits and terms
In addition to improvements on single-family homes, FHA Title 1 loans can be used to finance a variety of other renovation projects.
Here’s a look at the loan and term limits for different types of residential properties.
Single Family and Multifamily Residential Properties
|Number of Units||Secured Maximum Loan Amounts||Unsecured||Loan Term|
|Maximum Loan Amts||Minimum||Maximum|
|One||$25,000||$7,500||6 months||20 years and 32 days|
It’s also worth noting that Title 1 loans are not restricted to residential home improvements. You may be able to secure up to $25,000 in funding for improvements on certain qualified, non-residential properties as well.
How to apply for an FHA Title 1 Loan
Step one to applying for an FHA Title 1 Loan is to find a HUD-approved lender who offers the product to borrowers.
Typically, the lender will begin the process by having you fill out a loan application. Next, the lender will likely access your credit report(s).
As part of the process, your lender will require that you produce certain documents. Documentation requirements can vary from lender to lender. In most cases, you will need to provide your lender with the following information, at a minimum:
- Recent bank statements
- Pay stubs
Many lenders offer the FHA Title 1 loan. Don’t be afraid to shop around to find the best deal and the best fit for your situation.
For many homeowners, financing expensive renovations and repairs can be a challenge. Those with credit problems or without any equity built up in their homes can be especially limited in their borrowing choices.
Tendayi Kapfidze, chief economist for LendingTree, the parent company of Student Loan Hero, sums it up: “Since the mortgage crisis, traditional home equity loans go to only people with stronger credit files. For someone with a weaker credit profile or little equity, an FHA Title 1 loan might be a good option to finance home improvements.”