Federal Housing Administration (FHA) Title 1 Loans are a well-kept secret by the U.S. Department of Housing and Urban Development. FHA routinely guarantees mortgage loans made by approved lenders, such as banks and credit unions, to borrowers with less than perfect credit and moderate incomes. They mitigate the risk of these mortgage loans for the lenders in case of borrower default.
We don’t often hear about the FHA Title 1 Loan program, but it is a home improvement, renovation, and repair loan program. Most people automatically think of applying for a home equity loan or a home equity line of credit (HELOC) to get the money for home improvement or repair. Not everyone can qualify for either the loan or the line of credit based on the equity in their home. That’s where the FHA Title 1 Loan program steps in.
The Basics of the FHA Title 1 Loan
An FHA Title 1 Loan is a loan available to homeowners for home repairs, improvements, and renovations that will increase the value of the home. Just like the FHA mortgage loan, FHA does not make the loan. It guarantees the loan, made by approved lenders, which are reimbursed in case of default by the homeowner. If you are buying a home that needs repairs, you can piggyback an FHA Title 1 Loan onto your first mortgage to fix up your new home. You can find a list of approved lenders on the Department of Housing and Urban Development website.
The Problem With Home Equity
Home repairs or improvements are expensive, and not many homeowners have large amounts of money available to cover them. They need to take out a loan and seem to gravitate toward using the equity they have in their home for that type of large expense. There are cases where that isn’t possible. If you are a first-time homebuyer and have very little equity in your new home, you may need an FHA Type 1 Loan, especially if you buy a fixer-upper.
- If you have refinanced your home in the past and have already taken the equity out of it, you may have to use an FHA Type 1 Loan if you have a need for home repairs or improvements.
- If you need to renovate your home for a family member with a disability and don’t have much equity in your home, the FHA Type 1 Loan covers this use of the loan.
- If you desire to make your home more energy efficient, you can use an FHA Type 1 loan to make those modifications.
- If you want to add on a room or need to put on a roof or make some other large repair or improvement that will add to the fair market value of your home, a FHA Type 1 Loan will help cover that expense, although you may have to tap an additional source due to the loan amount limit.
Some homeowners are still underwater on their mortgages after the housing bubble. These homeowners don’t have equity in their homes and would need the help of the FHA Title 1 Loan program if they needed to make improvements or repairs.
One thing you cannot do with an FHA Title 1 Loan is install any luxury item like a sauna, steam room, or hot tub.
Limits and Terms
- For single-family homes, the loan limit for FHA Type 1 Loans is $25,000.
- For multifamily homes, the loan limit for FHA Type 1 Loans is $60,000, with a limit of $12,000 for each individual unit.
Collateral is required in the form of your home unless the amount of the loan is below $7,500. That means if the borrower defaults on the loan, the lender can foreclose on the dwelling. If the loan amount is below $7,500, then the loan is on your signature alone.
Even manufactured homes are covered under the program and are eligible for loans of $25,090 with collateral.
The repayment term of the FHA Type 1 Loan is between six months and 20 years plus 32 days. There is no prepayment penalty. Interest rates on these loans depend on the lender where the loan is obtained and are fixed. Variable interest rates are not available. The level of interest rates in the broad economy and the creditworthiness of the borrower are two other factors that help to determine interest rates.
The application process for the FHA Type 1 Loan is like a mortgage loan but perhaps not as rigorous. The lender will pull the borrower’s credit report and look at their credit score. Income will be checked through income tax returns and W-2s to be sure the borrower can repay the loan, although there is no specific income requirement. The debt-to-income ratio should not be over 45%, and you must have occupied the home for a minimum of 90 days.