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The FHA Title 1 Loan: Everything You Need To Know Before Getting an FHA Home Improvement Loan

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If you're a homeowner or investor who has purchased a property and needs to do some renovations in order to make it more livable, an FHA Title 1 loan might be a viable financing option for you. Also known as the FHA home improvement loan, this federally-backed secondary loan option can be used to finance certain improvements without leveraging equity built up in the property.

With that in mind, if it sounds like the FHA Title 1 loan might be a good fit for you, read on below. We'll go over what this loan is, how it works, and how to qualify for one so you can learn if it might be a good fit for your next rehab project.

What is an FHA Title 1 loan?

At their core, FHA Title 1 loans are subordinate or secondary loans that can be taken out in addition to a mortgage to help fund certain home improvements, rehab projects, or home alterations. They are essentially the federal government's way of ensuring that low-to-moderate-income homeowners and long-term renters can afford to make necessary home improvements, even if they don't qualify for a traditional home equity loan, or HELOC.

While an FHA home improvement loan might sound similar to an FHA 203k loan, they are inherently different products. Since an FHA Title 1 loan is a secondary loan, it can be used in conjunction with a 203k loan. Typically, in this scenario, the 203k loan is used to purchase the property, and the Title 1 loan loan is used to fund any necessary renovations after the purchase has been completed.

Additionally, unlike a 203k loan, which can only be used for a primary residence, these loans can be used for improvements to single-family homes, multi-unit properties, mobile homes, or even commercial properties. In addition, the money can be used to make site improvements and can be put toward historic preservation.

How does a Title 1 loan work?

Similarly to any other FHA loan, the Federal Housing Administration does not lend money directly to borrowers. Instead, each loan is made by a private lender and the government guarantees it in case the borrower ends up defaulting on the loan. In particular, the FHA will guarantee up to 90% of the loan amount.

The maximum amount that you can borrow and the loan term will vary, depending on what kind of property you're intending to rehab. However, it’s important to note that loans worth less than $7,500 are typically unsecured, meaning that, like a personal loan, you will only have to guarantee them with your signature instead of using the property as collateral. Notably, while larger loan amounts are available, those will generally have to be secured by the property.

The maximum loan amount and maximum loan terms for each type of property are as follows:

TYPE OF PROPERTY Maximum Loan Amount Available Loan Term
ONE UNIT $25,000 6 months - 20 years and 32 days
TWO UNIT $24,000 6 months - 20 years and 32 days
THREE UNIT $36,000 6 months - 20 years and 32 days
FOUR UNIT $48,000 6 months - 20 years and 32 days
FIVE (OR MORE) UNITS $60,000 6 months - 20 years and 32 days
NONRESIDENTIAL PROPERTY $25,000 6 months - 20 years and 32 days
MANUFACTURED HOME THAT’S CLASSIFIED AS REAL PROPERTY $25,090 6 months - 15 years and 32 days
MANUFACTURED HOME THAT’S NOT CLASSIFIED AS REAL PROPERTY $7,500 6 months - 12 years and 32 days
HISTORIC PRESERVATION Lesser of $15,000 per dwelling unit or $45,000 6 months - 15 years and 32 days
FIRE-SAFETY EQUIPMENT $50,000 6 months - 20 years and 32 days

In addition, while it's possible to have more than one Title 1 loan at a time, the total amount of all of your combined loans can never exceed the maximum amount allowed for the type of property.

What are permitted improvements for a Title 1 loan?

Fortunately, the HUD guidelines for permitted improvements with Title 1 loan funds are fairly broad. According to the guidelines, any improvements you make with a Title 1 loan simply must "protect or improve the basic livability of the property."

With that in mind, eligible borrowers can make the following types of improvements using this rehab loan:

  • Accessibility improvements for people with disabilities, such as widening doorways or adding exterior ramps.
  • Energy efficiency improvements.
  • Replacing a roof or adding new flooring.
  • Replacing the home systems, such as plumbing or a heating element.
  • Installing new appliances.

Notably, you cannot use Title 1 funds for anything that could be considered a cosmetic Improvement or luxury improvements, such as adding a swimming pool to the property or building a guest house.

With a Title 1 loan, you can choose to work with contractors or you can do the work yourself. However, in either case, you’ll need to be able to verify that the funds were used for your improvements and those improvements were acceptable under the HUD guidelines.

How to qualify for a Title 1 loan

Luckily, the qualifying requirements for a Title 1 loan are fairly relaxed compared to other rehab loans on the market. In particular, this FHA loan does not come with a set credit score requirement, which means those with bad credit may still be considered eligible borrowers. In addition, you aren't required to have equity in the home in order to take out a Title 1 loan, which makes this home loan a viable option for those who have just purchased the property.

That said, there still are a few requirements that need to be met in order to qualify:

  • You must prove that you make enough income to cover the proposed monthly payment.
  • Your debt-to-income ratio must be less than or equal to 45%.
  • You must not be delinquent on any other federally-backed loan program.
  • If the property is a residence, you must live in it for at least 90 days.
  • You must be the homeowner or must hold a long-term lease that extends for at least six months past when the loan is due to be repaid in full.

How to apply for a Title 1 loan

Like all FHA loan programs, a Title 1 loan can only be offered through an FHA approved lender. With that in mind, if you think that Title 1 loan might be the right fit for you, the best thing to do is search HUD's lender list to find a qualified loan officer in your area.

From there, the process is a lot like applying for a new mortgage or refinancing your existing home loan. Your FHA- approved lender will direct you to fill out an application, and you'll be asked to submit appropriate documentation. In this case, in addition to the documentation that supports your income, you'll likely also be asked to provide a detailed description of your proposed repairs or home improvements.

The bottom line

An FHA Title 1 loan can be a viable loan option to help finance necessary improvements to a property for homeowners and investors alike, especially if you don't have equity built up in the property and are unable to qualify for a home equity loan or HELOC. However, because this loan is backed by FHA, it does have a few requirements that may make it less than ideal for those who are looking to do higher-end renovations.

To that end, if you're thinking of taking out a rehab loan, your best bet is to talk to a participating lender. They can look at the specifics of your financial situation and advise you on whether or not the FHA home-improvement loan could be the right fit for you.

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