Home renovations are expensive. What if you don’t qualify for a home equity loan? Are you out of luck? You’re not – the FHA is here to save the day with the FHA Title I loan.
Let’s look at some numbers. According to Realtor.com, the average kitchen remodel costs $20,074. Only need minor kitchen remodeling? You’re still looking at around $10,000, whereas a full remodel can cost as much as $50,000 if the kitchen is gutted.
This isn’t chunk change we’re talking about. The Title I loan offers you the opportunity to make these changes, or at least some of them. There are loan limits and restrictions you must follow first.
We discuss them below.
The FHA Title I Basics
If you fix up a single-family home that you live in, you may borrow up to $25,000. You can borrow less than that too. You don’t need equity in your home in order to qualify. The loan doesn’t use your existing equity as collateral. In fact, you may even be upside down on the loan and still get approved for the Title I loan.
In order to qualify, you must finance permanent property improvements. They can’t be luxurious changes, either. So don’t think about adding a hot tub or pool with your funds – it’s not allowed. The changes must either improve the function of your home or protect it in some way.
For example, if your roof is caving in, you need protection. The FHA Title I loan can help you pay for a new roof. You can also use it for things like broken utilities or serious repairs. However, you can use it for additions. Let’s say your family size is growing and you don’t have a bedroom for the new little one. You can use this loan to fund the addition.
Basically, it’s a good loan for one-time projects. You wouldn’t use it to replace all of the floors in your home over a period of a year or so. It’s more of a one and done type project.
Qualifying for the FHA Title I Loan
Qualifying for the FHA Title I loan is similar to qualifying for a mortgage. The only difference is you don’t need an appraisal. The lender might order one just to see how the improvements will improve the value of your home. But, your approval isn’t dependent on the current value of your home.
Instead, the lender looks at your credit score and income. They need to know that you can afford to pay the loan back. Each lender has their own requirements since they fund the loan. You’ll want to shop around, looking for different lenders and different requirements.
The Terms of the Title I Loan
The Title I loan can have a 20-year term at the maximum. You can opt for a shorter term, of course. But, you can’t borrow the money for longer than 240 payments. The interest rate you’ll receive is always fixed on this program too. This means your payment will not change from day 1. You also won’t be subjected to a prepayment penalty. You are free to pay the loan off whenever you want.
If you borrow less than $7,500, you won’t have to worry about putting up any type of collateral for the loan. However, if you borrow more than that amount, you’ll have to use your home as collateral. It’s not the way you think, though.
The lender will use the equity resulting from the improvements to determine if you qualify for the loan. For example, if you use the funds to build a new kitchen, the lender will find out how much the kitchen will improve your home’s value. The lender will then use that amount as collateral for the loan.
If you have a multi-unit home, your loan maximum is different. You can borrow $12,000 per unit, rather than $25,000. But, you can borrow a maximum of $60,000 with several units combined.
The FHA does not fund these loans – the individual lenders do. The FHA guarantees the loan for the lenders though. if you defaulted on the loan, the FHA would pay the lender back. This is how the lender is able to take on some risk with the Title I program.
The FHA Title I loan is a good option for those that can’t tap into the equity of their home. Homeowners that don’t have the cash for improvements do well with this loan. Just make sure you have enough income to cover your current liabilities and the addition of the new loan.
It’s a great option for borrowers that are currently upside down on their loan. The improvements can improve the value of the home. Once you pay off the Title I loan, you’ll again have equity in your home to rely on in the future.