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Dreaming of a fixer-upper that you can take from a diamond in the rough to a gleaming, updated gem? Maybe you’re searching for a way to make updates to your new home without waiting for the equity growth needed for a home equity loan. Or, perhaps you’re a hopeful homebuyer who needs to look outside the move-in-ready box to buy a home. (After all, according to U.S. property database curator, ATTOM Data Solutions’ Q4 2018 U.S. Home Affordability Report, the median home price nationally was at its least affordable level in more than a decade.)
While prices have been rising, remodeling activity in owner-occupied homes has been surging — up 7.5% in 2018, according to the Leading Indicator of Remodeling Activity (LIRA) report from the Remodeling Futures Program at the Joint Center for Housing Studies of Harvard University. And while the center predicts a decrease in annual growth in the national home improvement and repair market to 5.1% in 2019 — a figure that matches the average annual gain historically — spending is expected to rise to more than $350 billion.
But securing those renovation funds can be difficult, especially for people who can’t turn their home appreciation into cash-in-hand. What’s a homeowner to do if they don’t have equity in their home but still want to renovate? The FHA Title 1 loan may be option — for those who are aware of it.
“What I have noticed is very few people know what an FHA Title 1 loan is; as a matter of fact, many people have never even heard of it, even in the industry,” said Dallas-based Kevin Pierce, sales manager/senior loan originator at Cardinal Financial Co. “One of the main benefits to this loan, unlike a home equity line of credit (HELOC), is you don’t need equity in your home. This allows you to get a Title 1 loan without having to qualify with 80% loan-to-value [LTV] or 20-30% equity in the house you own.”
Intended for minor to moderate repairs and rehabilitation, the Title 1 loan can be used for single-family and multi-family properties, manufactured homes, nonresidential structures, fire safety equipment and also to preserve a historic home. Borrowers can either be property owners in the process of purchasing a property or have a long-term lease.
They don’t have carte blanche to use the funds however they see fit, though. The U.S. Department of Housing and Urban Development (HUD) mandates that, “Improvements must substantially protect or improve the basic livability or utility of the property.” That means luxury items like swimming pools, hot tubs and outdoor fireplaces are not allowed. A few ways HUD allows the funds to be used are to replace appliances, increase energy efficiency or make the home more accommodating for disabled persons.
Borrowers also don’t have unlimited funds to use. The Title 1 loan is capped at $25,000 for a one-unit, single-family structure; there are different maximum loan amounts for manufactured homes, multifamily properties and non-residential structures. “The maximum loan limit is $12,000 per unit up to $60,000 for multifamily units,” said Pierce.
But borrowers may have an incentive to go lower. Loan amounts up to $7,500 are unsecured, meaning you don’t need any collateral such as a deed of trust or mortgage. “If the loan exceeds $7,500, it must be secured by your home,” added Pierce.
Title 1 loans offer fixed rates determined by the lender with terms that vary depending on the type of structure:
- Single-family and multifamily structures = 20-year loan
- Manufactured home (with a foundation) = 15-year loan
- Mobile home = 12-year loan
There’s no penalty for paying the loan off early, and HUD doesn’t mandate whether improvements are made by the borrower or a contractor. Funds can also cover materials, permits, any costs related to architectural or engineering work, appraisals and inspections.
Let’s take a look at some of the other details of the loan.
FHA Title 1 loan requirements
What makes the Title 1 loan so attractive to borrowers is the fact that they don’t need to use the equity in their home — or even have equity in their home — to qualify. But there are other factors used to measure creditworthiness:
Occupancy Limits — Applicants must have occupied the home or manufactured home for at least 90 days. Any nonresidential structure being improved must have been completed before the borrower applies for the loan.
Credit Score — This loan is backed by the government but serviced by Federal Housing Authority (FHA)-approved lenders. HUD requires no minimum credit score, although lenders may apply their own minimums. Interest rates are also determined by the lender. Applicants can expect lenders to run their credit history to check for delinquencies or default judgments on government loans, as well as check employment history.
Income Requirements — There are no minimum income requirements from HUD.
Debt-to-income (DTI) — The maximum DTI is 45%. That means fixed expenses, housing costs, credit cards, car payments and any other outstanding debt cannot exceed 45% of your pretax income.
Benefits of using an FHA Title 1 loan for home improvements
While long-term equity gains are often a product of rising prices, one of the fastest ways to improve a home’s equity is to make property improvements. Home equity nationwide is currently sitting at $15,361, according to the most recent numbers from the Federal Reserve Bank of St. Louis — a number that has been steadily rising since 2011 and is forecast to increase another 4.3% in 2019 and 2.9% in 2020.
Other advantages of the Title 1 loan include:
- Low fixed-rates that can keep payments lower than HELOCs and help avoid credit card interest and fees while also providing stability with predictable payments.
- Can be used in conjunction with a 203(k) loan, an FHA loan that combines a first mortgage with renovation funds. Adding funds from a Title 1 loan can be a solution for covering unexpected renovation costs, completing planned projects (or adding more) and increasing flexibility because the 203(k) has somewhat stricter requirements and terms.
- Changes to make a home more energy-efficient are covered under the loan and may not only result in modern updates, but also make a home more comfortable and lower utility costs.
- It’s an easy way to fund fire safety improvements or to increase access in the home for those with disabilities. For instance, proceeds may be used to widen doorways or install wheelchair ramps.
How to apply for an FHA Title 1 Loan
Property owners can apply for the Title 1 loan through any FHA-approved lender, which will begin the approval process by accessing the borrower’s credit report. It also will verify employment and calculate your DTI ratio to determine if you meet the criteria for the loan. Borrowers can prepare for the application process by locating their last two years of W-2 forms and pay stubs, which are typically required for an FHA loan. Current bank statements may also be required.
Borrowers will also want to be aware that mortgage insurance is required on the Title 1 loan. The total premium is equal to 1% of the loan and can be paid upfront or rolled into the loan.
An FHA Title 1 loan can be a great option for those seeking a creative solution for buying a more affordable home and fixing it up or making necessary improvements with limited cash on hand or accessible home equity. Especially when used in conjunction with a 203(k) loan, borrowers may be able to increase the value of their home and earn equity that can pay them back when they go to sell, while creating a more livable home in the meantime.
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