Also, while it is possible to have more than one Title 1 loan at a time, the total amount of all your loans combined can never exceed the maximum amount allowed for the property type.
What upgrades are allowed for a Title 1 loan?
Fortunately, the HUD guidelines for improvements allowed with Title 1 loan funds are quite broad. According to the guidelines, any improvements you make with a Title 1 loan should simply “protect or improve the basic livability of the property.”
With this in mind, eligible borrowers can make the following types of improvements using this rehabilitation 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.
- Replace household systems, such as plumbing or a heating element.
- Installation of new appliances.
Notably, you cannot use Title 1 funds for anything that could be considered a cosmetic upgrade or luxury upgrades, 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 will need to be able to verify that the funds were used for your upgrades and that those upgrades were acceptable under HUD guidelines.
How to Qualify for a Title 1 Loan
Fortunately, the eligibility requirements for a Title 1 loan are quite relaxed compared to other rehabilitation loans on the market. In particular, this FHA loan does not come with a credit score requirement, which means those with bad credit can still be considered eligible borrowers. Plus, you don’t have to have the equity in the home to take out a Title 1 loan, making this home loan a viable option for those just starting out. bought the property.
That said, there are still a few requirements to be met to be eligible:
- You must prove that you earn enough income to cover the proposed monthly payment.
- Your debt ratio must be less than or equal to 45%.
- You must not be in default on any other federally supported loan program.
- If the property is a residence, you must live there for at least 90 days.
- You must be the owner or hold a emphyteutic lease of at least six months past when the loan must 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 the Title 1 loan might be right for you, the best thing to do is research List of HUD Lenders to find a qualified loan officer in your area.
From there, the process is much like applying for a new mortgage or refinancing your existing home loan. Your FHA-approved lender will ask you to complete an application, and you will be asked to submit the appropriate documentation. In this case, in addition to supporting documents of your income, you will probably also be asked to provide a detailed description of the repairs or improvements you are proposing.
The bottom line
An FHA Title 1 loan can be a viable loan option to help finance needed improvements to a property for homeowners and investors, especially if you do not have accumulated equity in the property and cannot qualify for a home equity loan or HELOC. . However, because this loan is FHA-backed, it has a few requirements that may make it less than ideal for those looking to do high-end renovations.
To that end, if you’re considering taking out a rehab loan, your best bet is to speak with a participating lender. They can look into the specifics of your financial situation and advise you on whether or not the FHA home improvement loan might be right for you.