FHA Title 1 Loans: What to Know About Home Improvement Loan Program
If your home needs important repairs to make it more livable, an FHA Title 1 loan could help. This FHA home improvement loan program through the Federal Housing Administration (FHA) provides insurance to private lenders, giving them the confidence to allow homeowners to borrow money for critical home improvements, even if they don’t have any equity.
Homeowners apply for a fixed-rate Title 1 loan through an approved bank, credit union or other lender.
- What are FHA Title 1 loans?
- FHA Title 1 loans: Limits and terms
- FHA Title 1 loan requirements
- How to apply for a Title 1 loan
- FHA Title 1 loans pros and cons
- FAQs about Title 1 loans
What are FHA Title 1 loans?
FHA Title 1 loans are the federal government’s way of helping low- to moderate-income homeowners finance critical home improvements if they don’t otherwise qualify for a traditional home equity loan. These loans are backed by the FHA but are issued through private lenders with their own money. The government insures against losses of up to 90% of the loan amount.
Money from these loans can be used to fix up single-family homes, as well as manufactured homes, multifamily properties and nonresidential buildings. The program also allows borrowers to use the proceeds for site improvements and the preservation of historic residences.
Loans of less than $7,500 typically are unsecured. The lender will use your property as collateral on loans above that amount. Homeowners can choose to do the improvements themselves or use contractors. All repairs must be permanent and make your home “more livable and useful,” according to the FHA, though that definition is fairly broad.
Improvement projects can include:
- Installing new flooring or a new roof
- Replacing the plumbing or heating system
- Installing or replacing appliances, such as dishwashers or ovens, that are built into the house
- Making the home accessible for someone with a disability, including adding exterior ramps or remodeling rooms for wheelchair access
- Adding energy-efficiency improvements and solar panels
You can’t use a Title 1 loan for luxury items, such as swimming pools or outdoor fireplaces, or for cosmetic upgrades.
FHA Title 1 loans: Limits and terms
Loans up to $7,500 are available for all eligible properties with only your signature, meaning you won’t need to put up any property as collateral. The maximum amount you’re able to borrow varies depending on the type of property and how many units are in the home. FHA Title 1 loans don’t have a prepayment penalty.
For a single-family home, you’ll be limited to $25,000 with a secured Title 1 loan. Loan terms can be as short as six months and as long as 20 years.
|Single-Family and Multifamily Properties|
|Number of units||Secured maximum loan amount||Loan terms|
|1||$25,000||6 months to 20 years and 32 days|
|Other Property Types|
|Property/purpose||Maximum loan amount||Loan terms|
|Nonresidential buildings, like a detached garage or shed||$25,000||6 months to 20 years and 32 days|
|Manufactured home that is real property||$25,090||6 months to 15 years and 32 days|
|Manufactured home that isn’t real property||$7,500||6 months to 12 years and 32 days|
|Historic preservation||Lesser of $15,000 per unit, or $45,000||6 months to 15 years and 32 days|
|Fire safety equipment||$50,000||6 months to 20 years and 32 days|
If you have more than one Title 1 loan, your total outstanding balance can’t exceed the maximum loan amount for the property or purpose type you’re using that has the highest maximum.
FHA Title 1 loan requirements
To qualify for an FHA Title 1 loan, potential borrowers must meet certain broad requirements. Unlike many mortgage programs, there are no hard credit score requirements, and properties with little or no equity can still qualify.
However, lenders will make sure potential borrowers meet Title 1 loan requirements. They will likely ask for your Social Security number, pay stubs and W-2 forms to verify employment and income, as well as bank statements to verify certain types of income, such as Social Security, disability or pensions. Also, borrowers must:
- Own the home, have a lease on it that extends at least 6 months past when the Title 1 loan will be repaid or purchase the property under an installment contract
- Be able to repay the loan in regular monthly installments (lenders will pull a credit report and verify your employment)
- Not be delinquent or in default on another federally backed loan program
- Have occupied the home for at least 90 days
- Maintain a debt-to-income (DTI) ratio of 45% or below
No appraisal is required. Title 1 loan borrowers also don’t need to participate in housing counseling.
How to apply for a Title 1 loan
If you think an FHA Title 1 loan is right for you, the first thing you want to do is search HUD’s lender list for approved lenders near you. The search tool will allow you to narrow the list to lenders in your city and show only companies that offer Title 1 loans.
Once you’ve chosen a few to contact, these FHA Title 1-approved lenders will direct you to fill out an application. You’ll also need to provide a detailed description of the proposed repairs, as Title 1 loan money can be used only on the work described in your application.
If you’re using a contractor, give your lender a copy of the proposal or work contract that describes the repairs to be done and the cost estimates. If you’re doing the work yourself, send your lender a written description of the repairs, a materials list and costs.
FHA Title 1 loans pros and cons
Loose qualification requirements. FHA Title 1 loans don’t have set credit score requirements, and many types of properties are eligible for financing.
No equity needed. While many home improvement loans are based on home equity, these loans can work for homeowners with little to no equity.
Unsecured loans available. Loans of less than $7,500 don’t require collateral, meaning your property is safe from the possibility of foreclosure.
Low, fixed interest rates. The FHA requires lenders to offer fixed interest rates and charge the market rate.
Must use an approved lender. Only lenders approved by the FHA can issue Title 1 renovation loans. If your current lender isn’t on the list, you can’t use them.
Must pay insurance premium. The FHA charges a 1% annual insurance premium, or $1 per $100 borrowed. The borrower will usually pay for this separately, but it can be covered with a higher interest rate.
Must limit spending to critical repairs. While home equity loans typically have few strings attached, Title 1 loans can be used only for the repairs outlined in the loan application.
FAQs about Title 1 loans
How can I figure out FHA Title 1 home improvement loan rates?
While FHA Title 1 lenders must charge market rates, each lender may quote you a different Title 1 loan rate. Be sure to shop around, inquiring at multiple HUD-approved lenders in your area. FHA Title 1 loan interest rates aren’t subsidized by the federal government, though organizations in some areas will offer reduced-rate loans through the Title 1 program.
Can I combine a Title 1 loan with an FHA 203(k) loan?
Yes, a Title 1 loan can be used in combination with the FHA’s 203(k) rehabilitation loan program. The Title 1 loan will cover the cost of repairs, while the 203(k) loan typically covers the purchase price of the property.
Can I piggyback an FHA Title 1 loan on a mortgage?
Yes, you can take out an FHA Title 1 loan at the same time as a new purchase mortgage or alongside a mortgage refinance.