An FHA loan is a home loan insured by the U.S. Federal Housing Administration and is a popular government program for first time homebuyers since it allows borrowers to make down payments as low as 3.5%. While FHA loans are well known for home purchases, many borrowers are not aware there is an FHA home improvement loan called Title 1 loans that can either be joined with a home purchase through an FHA loan or used separately.
FHA home improvement loan requirements
To qualify for an FHA home improvement loan you must:
- Own, lease or be purchasing the property in need of improvements
- Can be a single family home and some condos are eligible, but not co-ops
- Have a debt-to-income ratio of 45% of less
- Verify the use of the money is for the intended improvements
- Total value of the property after renovation must fall within the FHA mortgage limits.
What are advantages of an FHA home improvement loan?
An FHA home improvement loan may suit your next home repair project if you own a home that needs maintenance or want to purchase a “fixer upper”. These flexible loans are appropriate for those who need cash to cover the fixes.
- No income requirement
- Good for homeowners with less than perfect credit
- No equity or appraisal needed
- There are no location restrictions
- No security for loans under $7,500 other than your signature
- Quick approval for the loan
- Fixed interest rates
- Flexible loan terms
- No prepayment penalties
- Can increase the value of your home with the right improvements
Disadvantages of FHA home improvement loans
While there are downsides, there are some caveats to this type of home improvement loan.
- Some of the FHA loans like the 203(k) could take longer to close than a typical conventional loan as you need to get a construction plan in place with costs before work begins.
- FHA-insured loans are subject to a monthly insurance premium, which must be paid throughout the life of the loan.
- A funding fee is required.
- There may be more paperwork involved in 203(k) loans as you must show a proposal and estimates for the work you want to do before purchase.
What is an FHA Title 1 loan?
An FHA Title 1 loan helps low- and moderate-income borrowers who don’t have enough equity in their home to fund renovations and home improvements. These loans fall under the Department of Housing and Urban Development (HUD) and has a broad definition which says the proceeds can be used “for improvements that will make your home basically more livable and useful.”
The monies can also be applied to dishwashers, refrigerators and ovens that are built into the house as well as to provide greater accessibility for disabled people or energy-efficiency upgrades such as solar roofing. Improvements may be made by a contractor or yourself.
The loans are funded by FHA-approved lenders such as banks or mortgage companies, but insured by HUD. There are additional home improvement loan options under the FHA Title 1 program including a 203(b) mortgage loan and 203(k) loan. https://www.hud.gov/program_offices/housing/sfh/title/sfixhs
What is a 203(b) mortgage?
A 203(b) mortgage with repair escrow is a loan insured by the FHA and is for homes that need minor repairs. For this loan, the home must be habitable for the loan to be approved, so that would exclude larger repairs to the home’s basic structure. Lenders generally offer 15 or 30 years terms for these loans. Interest rates are determined by the lender.
What is a 203(k) mortgage?
203(k) loans, also known as a 203(k) Rehab loan allows borrowers to cover the purchase and repair for a fixer upper or home with more serious issues costing more than $5,000. This Rehab loan allows the homebuyer to roll the purchase and repair into one loan, so you can buy and fix up a home at the same time or you can refinance with the 203(k) loan and roll the costs of the remodel into your new loan.
203 (b) and 203(k) mortgage requirements
For both 203(b) and 203(k) loans, you should have:
- At least a 620 credit score
- Have a debt-to-income ratio between 41% to 45%
- A down payment of at least 3.5%
- Own and occupy the property you want to renovate
- A loan amount (including purchase and renovation costs) of less than the FHA maximum limit for your location
Home improvement projects are expensive, but an FHA loan and their home improvement loan programs make it more affordable. These flexible, all-in-one solutions are a great way to finance a home and renovation all together in one loan. Shop around to find approved FHA-lenders that provide the best mortgage rates for your needs.
For more information on FHA loans, contact a Freedom Mortgage home loan specialist.