HomeImproving Your Home With HUD's Title IProgram
by Bob Kerlin, First Potomac Mortgage
Equity in a property is always a primary consideration when a homeownerapplies for refinancing or a home equity line. Now, there are several productsfor homeowners who bought at the top of the market or with a low downpaymentand consequently do not have equity in their homes. Most home equity loanswill only go up to 80 percent of the present value of the home, and theproperty must be owner-occupied. HUD could have the answer, however, withits FHA Title 1 loan.
The Federal Housing Administration (FHA) Title 1 loan was the first loanprogram authorized by FHA in 1934 and allows homeowners who have littleor no equity in their homes to get home improvement loans. Many decks andbasements, for example, have been completed using home equity loans sincethe Tax Reform Act of 1986. But if you home does not have enough equitybuilt up to qualify for a standard home equity line, the Title 1 loan allowsup to a total of $25,000 for most improvements. Here are several examplecases in which Title 1 could be used:
· A family member has a health crisis and must move in with you,as a result, a new bedroom and bathroom must be built on to the house.
· The house is 20 years old, and the heating system fails in themiddle of winter or the air conditioning system fails in summer.
· A homebuyer who barely qualified at a 28/36 ratio to buy thehouse with a conventional loan had to forego a deck and finished basementcan now qualify under Title 1's total debt ratio of 45%.
· A house that will not sell can be spruced up by the owner toimprove chances for a sale.
· Owners who already have a home equity loan but need to do somelong-neglected maintenance can use the Title 1 loan as a third trust.
The basics of the program are simple: Loan amount - maximum $25,000,Equity in property - not necessary, Length of time residing in property- no time limit, Ownership - must have a least 50%, Investor Loans - allowed$25,000 maximum, Schedule of improvements - must be stated on loan application,Interest rate - varies depending on credit report, Loan term - maximum 20years, minimum 32 days, Money needed at application - nothing, all feesdeducted from loan amount, Loan origination and closing costs - can alsobe deducted from loan amount, Loan position - can be first, second or eventhird trust, Total debt ratio - 45% including Title 1 loan; compensatingfactors can move this higher, Inspection - FHA will inspect six months afterfunding, Cash out - not allowed, Credit - first trust must be current, othercredit acceptable, Co-signers - allowed, must sign note and not deed; co-signermust be financially capable of servicing the mortgage debt on their own,Interest deductability - yes, in most cases, but consult a tax advisor,Processing time - usually 10 business days from application to settlement,Restriction on amount of first trust - none; can be $1 million, owner canstill get a Title 1 loan; can be used in conjunction with another FHA, VAor conventional loan; can not be used with a wrap mortgage or land contract,Prepayment penalty - no penalty, Documentation needed - copy of originalsettlement statement, deed, deed of trust, note, past two years' W-2s, threemonths' pay stubs; self-employed borrowers will have to have two years'complete tax returns and a year-to-date profit-and-loss statement, Improvementsallowed - Almost anything that adds to the basic livability of the homewithout being a luxury; some of the items include: acoustic tiles, atticfans, bathrooms, blacktopping, built-in bookcases, carports, decks, garagedoor openers, elevators, exterior finishing work, flooring, gutters, insulation,greenhouses, landscaping, water mains, painting, patios, porches, septictanks, sea walls, trees, walkways, water heaters, windows, electrical wiring.FHA gives wide latitude to improvements but there are several items it willnot approve, Ineligible improvements - luxury items such as: bathhouses,carpeting in kitchen, bath or patio, intercom systems, exterior hot tubs,spas or whirlpools, guest houses, orchards, satellite antennas, steam baths,swimming pools, tennis courts and window treatments.
In short, HUD-FHA makes it possible for home buyers to go to settlementon a house then immediately initiate a Title 1 loan to obtain the extrasthat were not allowed under tighter first trust ratios. For a list of lendersparticipating in Title 1, contact HUD's toll free number at:
(800) 669-5152
Bob Kerlin is a mortgage banker with First Potomac Mortgage.