Improving Your Home With HUD's Title I Program

by Bob Kerlin, First Potomac Mortgage

Equity in a property is always a primary consideration when a homeowner applies for refinancing or a home equity line. Now, there are several products for homeowners who bought at the top of the market or with a low downpayment and consequently do not have equity in their homes. Most home equity loans will only go up to 80 percent of the present value of the home, and the property must be owner-occupied. HUD could have the answer, however, with its FHA Title 1 loan.

The Federal Housing Administration (FHA) Title 1 loan was the first loan program authorized by FHA in 1934 and allows homeowners who have little or no equity in their homes to get home improvement loans. Many decks and basements, for example, have been completed using home equity loans since the Tax Reform Act of 1986. But if you home does not have enough equity built up to qualify for a standard home equity line, the Title 1 loan allows up to a total of $25,000 for most improvements. Here are several example cases 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 the middle of winter or the air conditioning system fails in summer.

· A homebuyer who barely qualified at a 28/36 ratio to buy the house with a conventional loan had to forego a deck and finished basement can now qualify under Title 1's total debt ratio of 45%.

· A house that will not sell can be spruced up by the owner to improve chances for a sale.

· Owners who already have a home equity loan but need to do some long-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 20 years, minimum 32 days, Money needed at application - nothing, all fees deducted from loan amount, Loan origination and closing costs - can also be deducted from loan amount, Loan position - can be first, second or even third trust, Total debt ratio - 45% including Title 1 loan; compensating factors can move this higher, Inspection - FHA will inspect six months after funding, Cash out - not allowed, Credit - first trust must be current, other credit acceptable, Co-signers - allowed, must sign note and not deed; co-signer must 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 can still get a Title 1 loan; can be used in conjunction with another FHA, VA or conventional loan; can not be used with a wrap mortgage or land contract, Prepayment penalty - no penalty, Documentation needed - copy of original settlement statement, deed, deed of trust, note, past two years' W-2s, three months' pay stubs; self-employed borrowers will have to have two years' complete tax returns and a year-to-date profit-and-loss statement, Improvements allowed - Almost anything that adds to the basic livability of the home without being a luxury; some of the items include: acoustic tiles, attic fans, bathrooms, blacktopping, built-in bookcases, carports, decks, garage door openers, elevators, exterior finishing work, flooring, gutters, insulation, greenhouses, landscaping, water mains, painting, patios, porches, septic tanks, sea walls, trees, walkways, water heaters, windows, electrical wiring. FHA gives wide latitude to improvements but there are several items it will not 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 settlement on a house then immediately initiate a Title 1 loan to obtain the extras that were not allowed under tighter first trust ratios. For a list of lenders participating in Title 1, contact HUD's toll free number at:

(800) 669-5152

Bob Kerlin is a mortgage banker with First Potomac Mortgage.

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