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Buying a home and keeping up with regular maintenance can be expensive, so if your property requires any major updates, you may need to explore financing to help pay for it. Fortunately, homeowners in this position have myriad options, including the lesser-known FHA Title 1 Home Improvement Loan. This government-backed loan helps property owners cover certain property improvements or repairs up to $25,000.
You could qualify for an FHA Home Improvement Loan through a HUD-approved lender if you own and reside in your home and need to finance critical improvements. The loan can't be used for temporary or luxury items, but for eligible borrowers, it may offer better terms or be more accessible than other financing options.
How Do FHA Title 1 Home Improvement Loans Work?
A traditional FHA loan is a government-backed mortgage that makes it possible to buy a home with a down payment as low as 3.5%. But what if you already own a home and need to make important updates that are beyond your budget?
You could apply for an FHA Title 1 Home Improvement Loan, which helps homeowners pay for certain types of work on a property. These loans are backed by the federal government (specifically the Federal Housing Administration), but homeowners apply for and obtain them from approved lenders, such as banks or credit unions. Since the loan is insured by the government, there's less risk for the lender, so they can be more lenient with borrowing criteria.
The loans are usually secured by your property, but if you borrow less than $7,500, you can obtain an unsecured loan. For single-family homes, homeowners can borrow up to $25,000 for a term of up to 20 years. For a manufactured home on a permanent foundation, the limit is $25,090; if the manufactured home is not on a permanent foundation, the max is $7,500. You don't need equity in your home to apply.
These loans can't be used for luxury items like pools or outdoor fireplaces, however, so they're less flexible than some financing options. The improvements must "substantially protect or improve the basic livability or utility of the property," according to HUD. Eligible improvements include built-in appliances such as dishwashers, refrigerators or ovens; improvements that add accessibility for a disabled person; or energy-conserving and solar power improvements. You typically must show the lender the proposal or contract detailing the work to be done.
FHA Home Improvement Loans don't cover the purchase of a home, but only updates to a property you already own. They're different from FHA 203(k) loans, which allow you to borrow money to both buy and renovate a home in a single loan. However, you can use an FHA Title 1 Home Improvement Loan concurrently with another type of mortgage to buy and renovate at the same time. While you can typically only have one FHA loan out at a time, there's no limit to how many times you can utilize FHA loans in your lifetime.
Requirements for an FHA Home Improvement Loan
Before you apply for an FHA Home Improvement Loan, make sure you're familiar with the requirements of the borrower, property and improvements. These include (but aren't limited to):
- Residential properties must have been occupied for at least 90 days.
- You must either own the home or be a long-term renter. If you lease the property, your lease must extend at least six months beyond the loan term.
- While there aren't specific income or credit score requirements, your credit will be checked and you must also have verifiable income or employment. In addition, your debt-to-income ratio cannot exceed 45%.
- You can't be delinquent or in default on another federally guaranteed loan.
- Loans must be used for the specific purposes mentioned above.
How to Get an FHA Home Improvement Loan
Just like with regular FHA loans, an FHA Home Improvement Loan is obtained through a HUD-approved lender. You can search for one in your area and find out how they process applications.
You can also meet with a HUD-approved counseling agency, which offers guidance on whether an FHA loan is right for you and guides you through the process if needed.
Keep in mind that while lenders are required to offer fixed interest rates on par with market rates, the government doesn't dictate rates, so they can vary by lender.
Other Options for Home Improvement
While FHA Home Improvement Loans have advantages, there are plenty of other options to obtain money for home improvement purposes, including:
- Home equity loan or home equity line of credit (HELOC)
- Cash-out refinance
- Personal loans
- Credit cards
Each option has varying credit and equity requirements, plus their own benefits and drawbacks. For example, secured options such as a HELOC or home equity loan may be easier to qualify for and have more favorable rates than an unsecured loan. However, you must have equity in your home to be approved.
The amount you need to borrow and the timeline in which you can pay back the funds can also dictate the best financing option. If you are looking for a large amount that you hope to pay back over several years, for example, a credit card likely will not be your best option due the high interest costs you'll pay over time. Make sure to carefully research and compare your options.
Know Your Credit Score First
Whichever home improvement financing option you pursue, the lender will review your credit to ensure you have a solid history of paying your bills on time and can handle an additional debt. Before you apply for an FHA Home Improvement Loan or other financing, check your credit report and score to see what lenders will see. If you're not in a rush, this can also give you time to improve your credit, which can help increase your chances of getting approved for a loan and landing a lower interest rate.