Tom Kelly: Can’t borrow more? FHA home-improvement program could work

Can’t borrow more? Home improvement program could work

A torrential downpour 10 days ago exposed a problem with the roof over the deck of Mrs. Larson.

Although Edith Larson, 72, had plenty of income for her normal routine, she had not set aside enough cash for such a costly repair. Plus, her rural place was not appreciating in value and she had just finished a refinance to “get her son on his feet again.”

For Edith – and others like her who have hit their maximum loan limits – there is an FHA program to consider.

The Department of Housing and Urban Development is mostly known for its low down-payment home loans offered through conventional lenders and insured by the Federal Housing Administration. But FHA has a home-improvement loan program, too, and it has come in handy for folks who need cash and can’t get a home equity loan because of already high loan amounts or slumping home values. Many seniors and retirees fall into this category.

FHA Title 1 loans of up to $25,000 are available to owner occupants and investors who want to repair or improve their property. Up to $15,000 can be obtained regardless of home value. And, if you need $7,500 or less, no security is necessary. To obtain the loan, you need to own the property or hold a long-term lease to it. Borrowers must execute a note agreeing to repay the loan and meet very lenient qualifying guidelines. Total debt (including present home loans) may not exceed 45 percent of monthly income.

The loan is great for people who can’t borrow any more money in the conventional market. It works well for investors who purchased a run-down home that they want to fix up and resell in a hurry. With this loan, they don’t have to spend all their money to do the work.

And, up to $7,500 is available to borrowers with manufactured homes that are classified as personal property. These homes typically are in a manufactured home park, or they do not have a permanent foundation or are where the homeowner does not own the property beneath the home.

The Title 1 loan fills a need, but the loan is not inexpensive. Fees vary from lender to lender but can be 10 percent of the loan amount for loans up to $20,000 ($1,000 for a $10,000 loan; $2,000 for $20,000) with interest rates in the 10 to 12 percent range.

Obviously, these loans are significantly more expensive than home-equity loans. In fact, the interest rate can be double what can be obtained in the conventional market. But some people don’t have the luxury of qualifying for the best loans available and need “unconventional” financing just to get on with their lives. Banks and other qualified lenders make these loans from their own funds; HUD then insures the lender against a possible loss. The loan insurance program is authorized by Title 1 of the National Housing Act, thus the loan name.

In another example, a couple near Shelton who had purchased a home three years ago for $120,000 recently received an appraisal for $105,000. They desperately needed to borrow some money to make repairs, but they owed as much on the home as the appraised value. The Title I loan turned out to be a real benefit to them. Because Title 1 guidelines do not require borrowers to have equity established in the property for amounts less than $15,000, new homeowners or individuals who have recently refinanced have a chance to make improvements on their home right after they purchase – something virtually impossible under conventional guidelines.

According to HUD, Title 1 loans may be used for any improvements that “will make your home basically more livable and useful.” Therefore, you can use Title 1 cash for built-in dishwashers, refrigerators, freezers and ovens. The loans, however, cannot be used for “certain luxury-type” items such as swimming pools or outdoor fireplaces. Title 1 money cannot pay for work that has already been done.

Improvements can be made by the homeowner or through a contractor or dealer. Your loan can be used to pay for materials and labor. In addition, the cash from the loan can pay for architectural and engineering costs and building permit fees. The federal government requires an inspection for loans greater than $7,500. When the work is finished, you must furnish the lender with a completion certificate.

The FHA Title 1 Loan may not be the perfect way to finance a home-improvement project, but it could be the only way for some folks. To find a lender offering the program in your area, telephone (800) 767-7468 or visit https://www.hud.gov.