Title I loans make it easier to finance home renovations
You may not see them pushed as hard on
television and radio ads, but borrowers looking for a smart way to finance renovations
during the busy spring and summer season may want to check out Title I home
improvement loans. They often have lower rates and fees, as well as more lenient
underwriting standards, than conventional improvement loans. And there are no
income limits on eligibility.
With rising temperatures and the upcoming start of hurricane
season making big-ticket items such as air conditioning systems and shutters
look more desirable, now's a good time to give the decades-old program a once-over.
comes and goes
Title I loans have been around since the days of FDR, but they've
faded in and out in popularity over the years. Like Federal
Housing Administration first mortgages, they're issued by private lenders
and backed by government insurance that protects those lenders from losses.
But unlike FHA mortgages, which help people purchase houses, Title I loans assist
borrowers looking to upgrade properties they already own.
Consumers can get up to $25,000 for single-family home improvements
over loan terms of as long as 20 years. The improvements may consist of just
about anything except luxury items. New windows, air conditioning systems, storm
shutters or roof repairs qualify, whereas a new pool or hot tub doesn't. Borrowers
obtain the money either by applying to a direct lender, or applying through
a "dealer" -- typically a building contractor who works in partnership with
a HUD-approved indirect lender.
In both cases, a homeowner puts together a list of materials
needed for the project and how much they cost. On the direct loan side, a lender
reviews that list, approves the loan and advances the money straight to the
borrower, who starts making payments soon thereafter. The customer usually has
six months to get the work done, after which time the lender inspects the results
to make sure everything went OK.
On the dealer side of the business, the borrower fills out
an application and qualifies. The contractor then orders the materials and starts
work. After the project is completed, the consumer signs off on it and the indirect
lender has it inspected. If all is well, the contractor gets paid, the lender
assumes the loan and the borrower starts sending in monthly payments.
over second mortgages
Though they resemble traditional second mortgages, Title I loans offer
customers a host of advantages. For starters, the government doesn't require
borrowers to have equity in their homes. That gives new homeowners and those
with high loan-to-value first mortgages a chance to renovate. In many cases,
Title I loans are available for homeowners with first and second mortgages.
Lenders can't charge more than five points, or 5 percent
of the loan amount, in fees on Title I loans either. Since HUD doesn't require
a property appraisal, closing costs are sometimes lower than they are with conventional
home equity loans, too. Interest rates are typically lower as well because the
government insurance protects lenders from almost all of their losses if a borrower
defaults. Lastly, credit standards aren't as onerous with Title I loans as
they are with some other financing options.
Because of its allure, the program soared in popularity
through the middle of the 1990s. Lenders made slightly more than 97,000 single-family
Title I loans in 1996 for $1.4 billion, up from almost 48,000 loans for $375
million in 1988. But since then, volume has gradually declined, with 39,873
loans for $575 million made in 2005 and 30,085 for $439 million in 2006.
Experts cite many reasons, but the explosion of non-government high
loan-to-value lending takes most of the blame. Beginning in the middle of the
last decade, lenders began aggressively soliciting homeowners to take out mortgages
for more than the value of their properties. Consumers took the bait, too, because
they could use money from these so-called "125s" (named for the maximum overall
loan-to-value ratio that most lenders allow) for purposes other than home improvement,
such as debt consolidation.
Scandals in the dealer loan portion of the Title I program
didn't help either. A few years back, it came to light that shady contractors
were taking advantage of a program loophole to perform shoddy work and get paid
Still, it's a
cost-effective way to borrow
Yet for all the headaches it's caused industry participants, the Title I program still offers consumers a cost-effective way to borrow.
Homeowners can get rates in the 10 percent to 14 percent
range on Title I loans. Private lenders sometimes charge double what HUD allows.
Consumers can't use Title I loans for frivolous spending either, so there's
somewhat of a debt-deterrent benefit not found in the conventional market.
There is an insurance charge with Title I loans though.
It comes to 1 percent of the loan amount. But because there's no need for an
appraisal, the consumer catches a closing cost break with a HUD-backed loan.
For more information on Title I loans, and a list of approved lenders, go
to the HUD's
Title I website.
-- Updated: March 8, 2007