Want to add a new bathroom to your home this summer? Maybe it’s time to replace that 20-year-old roof. Or maybe a sagging foundation needs shoring.
Unfortunately, remodeling and home renovations are expensive. How will you pay for the work?
Many homeowners in this situation will opt for a home equity loan to fund repairs or improvements. But what if you lack home equity? Maybe you're underwater on your mortgage? Or perhaps you have a manufactured home or a house on leased land, which doesn't qualify as real estate?
You might find help through a HUD/FHA Title 1 home-improvement loan . Unlike home equity loans or lines of credit, the Title 1 program doesn't require you to have built up any equity in your home.
The no-equity problem
Through the FHA Title 1 home improvement loan program, homeowners can qualify for renovation loans of up to $25,000, without worrying about whether they have enough equity to take out a home equity loan or home equity line of credit (HELOC).
Homeowners need loans such as these because home renovation projects tend to be expensive. In its 2016 Cost vs. Value report, Remodeling Magazine said that it costs an average of $44,233 to add a bathroom to a home. Replacing a roof costs an average of $20,142, while even a relatively minor project such as replacing a home’s siding costs an average of $14,100.
Most homeowners don't have that kind of money lying around. So they often turn to home equity loans, tapping the equity they've built up in their homes for loans that they can use to pay for improvements.
The challenge comes when homeowners don't have any equity in their homes. This isn't that rare. Many who purchased during the height of the housing boom are still "underwater" on their loans, owing more on their mortgage loans than what their homes are worth today. CoreLogic reported that in the fourth quarter of 2015, 4.3 million U.S. homeowners were negative equity. That was 8.5 percent of all mortgaged residential properties.
So what can these homeowners do? A HUD/FHA Title 1 home improvement loan is one good solution.
FHA Title 1 Home Improvement Loans
Homeowners can apply for Title 1 loans to fund a variety of improvements to their home, big or small. If your furnace conks out, you can apply for a Title 1 loan to fund its replacement. If you need a new roof costing $20,000, you can use a Title 1 loan to fund that, too.
According to HUD (U.S. Department of Housing and Urban Development), you can use Title 1 loans to finance permanent property improvements that protect or improve the livability or functionality of your home. This includes necessary fixes such as repairing a sagging foundation or alterations such as adding a third bedroom as your family grows.
However, you can’t use Title 1 loans for luxury items, such as installing a new hot tub or swimming pool. It’s best to check with your lender to determine if your planned project is allowed under the Title 1 program.
This type of loan makes sense for anyone taking on a single, moderate home-improvement project. And it’s an especially good choice if your home has lost value since you purchased it. That’s because you won’t have to worry about low or negative equity when applying for these loans. Lenders don’t require that appraisers determine how much your home is worth today before approving you for a Title 1 loan.
Getting a Title 1 loan
These loans are available through banks or other financial institutions that are HUD-approved Title 1 lenders (click on the link to find ones in your area). The FHA (Federal Housing Administration) does not originate these loans directly. Rates and closing costs may vary among lenders.
According to the Department of Housing and Urban Development, homeowners took out 5,548 Title 1 home improvement loans in fiscal year 2014.
If you've previously applied for a mortgage loan, you're already familiar with the application process for a Title 1 home improvement loan. Your lender will run your credit and might ask for proof that you can repay the loan on time. This might mean that you'll need to provide your lender with copies of your recent paycheck stubs, bank-account statements, income-tax returns and W2 statements.
Once you're approved for a loan, you'll have to pay it back with interest in regular monthly payments.
These are fixed-rate loans, meaning that your interest rate won't fluctuate over time. Rates on these loans, much like with a standard mortgage, vary depending on a host of factors, including the strength of your credit.
You can take out these loans for a maximum term of 20 years for single-family homes and multifamily properties, though you can apply for a shorter term, too. And don’t worry about paying off your loan early; Title 1 loans come with no prepayment penalties, so you can pay if off whenever you’d like without taking a financial hit.
Lending limits on a Title 1 loan
While Title 1 loans don't require any home equity up front, anything over $7,500 is still secured by the collateral in your home. The maximum you can borrow is based on the expected increase in your home value as a result of the improvements.
For a single-family home, the maximum amount that you can borrow under the Title 1 program is $25,000. If you are tackling a kitchen renovation that costs $50,000, you won't be able to fund the full amount of the job through the Title 1 program.
If you want to make renovations on a multifamily building, you can take out a Title 1 loan of up to an average of $12,000 per living unit up to a maximum of $60,000.
No collateral is required on a Title 1 home improvement loan of $7,500 or less, so the loan isn't secured by a mortgage or deed of trust on your property. This is a nice bonus: If you fail to make your loan payments on time, for whatever reason, your lender won't be able to go after your home.
This also means you can use a Title 1 loan for small home improvements on dwellings that are on leased land, such as most manufactured homes. Since these aren't considered real estate, it can be difficult to obtain a home equity loan on them.
However, if you take out a Title 1 loan for more than $7,500, the loan must be secured by your home collateral. When you do this, your lender can foreclose on your home if you don't make your monthly payments.