FHA Title 1 Loans: What You Should Know

If your home needs repairs to make it more livable, an FHA Title 1 loan could help. The Federal Housing Administration (FHA) insures loans from approved mortgage lenders, allowing them to lend funds to homeowners who need money for critical home improvements — even if those borrowers don’t have any equity in their properties and are unable to qualify for a traditional home loan.

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 fixed-rate loans for home improvement are backed by the FHA but are issued through private lenders with their own money. Even borrowers with bad credit or no equity can qualify — the government insures the lender 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.

Homeowners can choose to do the improvements themselves or use contractors, but all repairs must be permanent and make your home more livable and useful, according to the FHA. Eligible home improvement projects can include:

• Livability and usability improvements such as:
  • 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
• Accessibility improvements such as:
  • Adding exterior ramps
  • Lowering kitchen cabinets for easier access
  • Remodeling rooms for wheelchair access
• Green improvements such as:
  • Adding appliances that increase energy efficiency
  • Installing solar panels

Title 1 funds can also be used to cover some of the extra costs that come with home renovation, such as engineering or architectural, title, permit and appraisal fees.

However, 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 for 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 can borrow varies depending on the property type and the number of units in the home. FHA Title 1 loans don’t have a prepayment penalty.

For a single-family home, you’re limited to $25,000 with a secured Title 1 loan. The maximum loan term is 20 years. The table below shows the loan amounts and terms available for different Title 1 loans:

If your repairs are on a single-family home and are going to cost more than $25,000, the FHA offers 203(k) loans that allow you to borrow up to $35,000 for short-term home repairs and up to 110% of the home’s value (after the repairs are completed) for more substantial repairs. But keep in mind that you would have to refinance in order to use the 203(k) loan on a home you already own.

You can also use a Title 1 loan for various other property types that either aren’t traditional houses or aren’t residences at all (for example, safety equipment). The table below shows the loan terms available for these alternative property types.

If you have more than one Title 1 loan, your total outstanding balance can’t exceed the largest of the maximum loan amount limits for your property type or loan purpose.

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 homeowners with little or no equity can still qualify.

However, lenders will make sure potential borrowers meet Title 1 loan requirements. Luckily, these requirements are fairly simple:

• Ownership. You must own the home or have a lease on it that extends at least six months past when the Title 1 loan will be repaid.
• Credit. You must not be delinquent or in default on another federally backed loan program (as demonstrated by a CAIVRS check).
• Income and employment. You must be able to prove that you have the income to repay the loan in regular monthly installments and can maintain a debt-to-income (DTI) ratio of 47% or below.
• Mortgage insurance: You’ll pay the lender an annual mortgage insurance premium of $1 per each $100 financed.
• Occupancy. You need to have occupied the home for at least 90 days.

No appraisal is required. Title 1 loan borrowers also don’t need to participate in housing counseling, which is required for some other federally backed loans.

How to apply for a Title 1 loan

If you think an FHA Title 1 loan is right for you, you’ll first want to search the U.S. Department of Housing and Urban Development’s (HUD) lender list for approved FHA Title 1 lenders near you. The search tool will allow you to narrow down the list to show only HUD-approved lenders in your city that offer Title 1 loans.

Once you’ve chosen a few to contact, the FHA Title 1-approved lenders will direct you to fill out an application. You’ll also need to prepare 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

Pros

• Less 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.
• No prepayment penalties. Since you won’t be penalized for paying the loan off early, you’ll have more flexibility in how and when you can pay it off. Even just one extra payment a year can lead to big savings in the long run.
• Doesn’t have to be your primary residence. Unlike other FHA loans, Title 1 loans don’t require you to live in the home as your primary residence unless the property in question is a manufactured home.

Cons

• Must use an approved lender. Only FHA-approved lenders can issue Title 1 renovation loans. If your current lender isn’t on the list, you can’t use them.
• Must pay an insurance premium. The FHA charges a mortgage insurance premium equal to 1% of the loan amount annually.
• 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.

Alternatives to an FHA Title 1 loan

But what if a Title 1 loan doesn’t meet your needs? If you don’t have a high enough credit score for conventional loans or enough equity to qualify for a home equity loan or home equity line of credit (HELOC), don’t panic. You still have many options beyond a Title 1 loan.

Government home improvement loans and grants

As mentioned above, the FHA 203(k) program is a similar program that can be used to finance home improvements that cost up to 110% of the home’s value (after the repairs are completed).

But there are also many other government-backed home improvement loans and grants available, including:

• If you’re low-income:
  • HUD’s HOME Investment Partnerships Program and Community Development Block Grant Program provide funds that allow states, cities and counties to help low- and moderate-income homeowners rehab their homes.
• If your improvements are green:
  • The Residential PACE clean energy program backs renovation loans to homeowners making energy efficiency or renewable energy improvements. The debt is attached to the property, rather than the homeowner, which can ease the burden for borrowers who move or sell the home within a few years.
• If you’re a veteran:
  • VA renovation loans allow you to put zero down and don’t have minimum credit requirements or mandatory mortgage insurance payments.
  • VA Disability Housing Grants help qualifying veterans with disabilities make changes to their housing that improve livability, such as widening doors or adding ramps.
• If you’re a member of a federally recognized Native American Tribe or an Alaska Native:
  • The Housing Improvement Program (via U.S. Bureau of Indian Affairs) provides grants of up to $60,000 for the renovation and repair of substandard housing.
  • Section 184 Indian Home Loan Guarantee Program are federally guaranteed, fixed-rate mortgages issued by participating lenders for up to 30-year terms. Their low down payment requirement — only 2.25% — puts them in reach for many more potential borrowers than other loans.
• If you live in a rural area:
  • The Section 504 Home Repair program provides home improvement loans and grants to very low-income homeowners, as well as to homeowners over age 62 for repairs that target health and safety hazards.