FHA Home Improvement Loan: Rates, Criteria, and Alternative

An FHA home improvement loan is renovation funding secured by the federal government. It is a practical funding option for homeowners who need to perform some renovations to improve the appeal of their homes. These loans are insured by the Federal Housing Administration, which is part of the US Department of Housing and Urban Development (HUD). 

If you are also looking to compare and contrast renovation loans, RenoFi loans offer an ideal financing option for larger home renovation projects. Exploring the chances of securing an FHA home improvement loan, understanding how they work, and considering your alternatives can help you make informed decisions. 

Types of FHA Home Improvement Loans 

FHA home improvement loans can be used for different home improvement projects, such as essential repairs needed for roofing, plumbing, or electrical work, energy-efficient upgrades, accessibility improvements like a ramp, or modernizing and upgrading the kitchen, bathroom, or other areas of the home. 

Your loan option is determined by your property, funding amount, and improvement category. If you need to buy a fixer-upper, the FHA 203k loan is ideal. However, if you need to upgrade your home, you can explore other types of funding. 

FHA 203k Loans 

FHA 203k loans are used to fund repairs and the purchase of a home. You can use this loan to buy or refinance a building that requires upgrading, such as single-family, multi-family, condos, or mixed-use homes. A restricted 203k fund can be utilized for cheaper repairs that are not construction. A normal 203k fund is used for more sizable upgrades. 

If you are looking for help with a FHA 203(k) loan, RenoFi offers 203k loans through lending partners to help you find lenders for your property.

FHA Title 1 Loans  

If you have little or no standard income and do not qualify for a home equity of credit (HELOC) or home equity funding for repairs, this type of loan is ideal for improving your home habitability. This loan is also known as an FHA home improvement loan and doesn’t use up the existing property equity. 

These loans ensure that low- to moderate-income property owners and long-term renters can pay for required home upgrades without qualifying for conventional home loans. 

How a Title 1 Loan Works 

The FHA does not grant money directly to borrowers but approves loans made by private lenders in cases of defaulting on the funds. The amount guaranteed depends on the upgrades you intend to perform. Loans below $7,500 have no financial security, and you need to guarantee using your signature rather than the building as collateral. 

Applicants looking for bigger loan amounts must provide their property as collateral. You can have more than one Title 1 loan, but the total amount can’t go beyond the maximum amount required for your type of building. 

FHA Title 1 Loan Terms 

For single-family units, you can get up to $25,000 of secured Title 1 funding. This loan goes from six months to 20 years. For family units above two, you pay from $36,000 with a repayment period of six months to 20 years.

If your repair’s estimated cost is above $25,000 for a single-family unit, FHA approves 203k loans that can qualify you up to $35,000. This loan caters to short-term home renovations and up to 110% of the unit value. You also need funding to access the 203k loan if you already own the home you intend to renovate. 

Qualifications for an FHA Home Improvement Loan 

Applying for this loan requires the following:

• Your main home, where you have resided for the last 90 days before the loan application. 
• Credit check that includes a substantial income statement. 
• Your debt-to-revenue percentage is below 45%, which is calculated by summing up monthly debt payments and dividing them by the gross revenue. 
• You must not be in default on any other loan guaranteed by the federal government. 
• The loan must be used for renovations that are necessary for property habitability and not for cosmetic purposes.  
• The loan must have a fixed rate, and no appraisal or home counseling is needed. 

Benefits of an FHA Home Improvement Fund 

The FHA home improvement loan may offer rates from various lenders and allow you to explore the best loan option. You should consider these benefits before applying for an FHA Title 1 loan. 

• The loan has the lowest qualification requirements 
• You don’t require home equity to get this funding 
• The loans are not secured  
• The loan option generally offers low and specific interest rates

Factors That Determine the Type of Home Improvement Loan 

While you can choose any FHA home improvement loan, you need to consider a few factors, such as the following: 

• Home Renovation Project Type: The type of project you need to undertake determines the right loan for you. Projects like roof repairs and kitchen remodeling may require you to consider a one-time individual loan. 
• Interest Rate: You should be able to afford the interest rate of the home improvement loan you choose. Factors like your credit rating and loan type determine what interest rate your lender will work with. 
• Equity amount: if your credit score is good and you have accumulated a good equity amount in your home, you can consider an individual loan. 
• Monthly payments: check if the loan terms and monthly payments fit your budget before choosing any financing type. This will prevent you from defaulting in the future. 
• Type of Loan: home renovation loans have different rates and terms. If you choose a cash-out funding option, the interest rates will be lower since it is less risky for the lender. However, unsecured loans have huge risks to the lender and attract a higher interest charge. 

Other Loan Options for Home Improvement 

FHA loans require mortgage insurance premiums, which add to the monthly loan charges. Buyers who want to explore different options can qualify for them. Every option offers its benefits and drawbacks and has its requirements and interest rates. These options include: 

• Home equity loan 
• Home equity line of credit (HELOC) 
• Cash-out funding 
• Personal funding 
• Credit cards 

Why RenoFi Loans Are a Smart Option 

Instead of only using the equity you have in your house, RenoFi allows you to use the After Renovation Value (ARV) of your home as a lump sum at a fixed interest rate.

For example, if RenoFi assesses your renovation plan and believes you will increase the value of your home from $600,000 to $750,000, RenoFi loans will allow you to take a loan against the future ARV (After Renovation Value) of your home of $750,000.

Let’s compare a standard Home Equity Loan versus a RenoFi Home Equity Loan and imagine you want to spend $150,000 to renovate your new home and increase the value of your home by $150,000:

Scenario 1 (New Home Purchase): 

• Home price: $600,000
• Downpayment (20%): $120,000
• Current Mortgage Amount: $480,000

Example Home Equity Loan Amount: 

• $600,000 * 80% = $480,000 (80% of Total Home Value)
• $480,000 - $480,000 (Current Mortgage Balance) = $0 (Home Equity Loan Amount)

Example RenoFi Home Equity Loan Amount:

• Assuming that your renovation project will add $150,000 to your home value

• After Renovation Value of Your Home: $750,000

• RenoFi Loan Amount: 

  • $750,000 * 90% = $675,000 (90% of Total Home Value)
  • $675,000 - $480,000 = $195,000 (RenoFi Home Equity Loan Amount)

Using a RenoFi Home Equity Loan you have increased your loan amount from $0 to $195,000. Not only are you now able to borrow the $150,000 you wanted to renovate your home, but you can now borrow up to $195,000 because the RenoFi loan is written against your ARV (After Renovation Value).

Without RenoFi loans, you would not have been able to borrow the $150,000 needed to add the renovations that would increase the value of your home by $150,000. Now, with RenoFi loans, you are now able to get the loan you need to add the renovations you want to your home.

Scenario 2 (Recent Home Purchase): Assuming that you have now paid 10% of your mortgage:

• Home price: $600,000
• Current Mortgage Amount: $420,000

Example Home Equity Loan Amount: 

• Example Home Equity Loan % of Home Price: 80%

• Example Home Equity Loan Amount: 

  • $600,000 * 80% = $480,000 (80% of Total Home Value)
  • $480,000 - $420,000 (Current Mortgage Balance) = $60,000 (Home Equity Loan Amount)

Example RenoFi Home Equity Loan Amount:

• Assuming that your renovation project will add $150,000 to your home value

• After Renovation Value of Your Home: $750,000

• RenoFi Loan Amount: 

  • $750,000 * 90% = $675,000 (90% of Total Home Value)
  • $675,000 - $420,000 = $255,000 (RenoFi Home Equity Loan Amount)

Using a RenoFi Home Equity Loan you have increased your loan amount from $60,000 to $255,000 (4.25x more). Not only are you now able to borrow the $150,000 you wanted to renovate your home, but you can now borrow up to $255,000 because the RenoFi loan is written against your ARV (After Renovation Value). 

Here’s a summary of the difference between traditional and RenoFi home loans in table form: 

In addition to letting you borrow more money for your home renovations, RenoFi loans also offer:

• No draw periods
• No inspections
• No need to give up your original loan
• Higher borrowing limits

RenoFi loans are funded on the day the loan is closed and that is it. Take out the $195k and you get $195k in your bank and you have 20 years to pay off in equal monthly payments with interest and principal, just like a standard mortgage.

Conclusion 

An FHA home improvement loan allows you to save for purchases because it rolls financing for buying and renovations into one loan. Consequently, our RenoFi loans are an ideal choice for those larger home improvement projects on your list. Here’s why more people are turning to RenoFi:

• Increased Borrowing Power: Traditional loans often limit you to borrowing up to 80% of your current home value. Alternatively, RenoFi allows you to borrow up to 125% of your home’s current value or 90% of its future value, whichever is lower. This means more money for your renovation project without the need to refinance.
• No Need to Refinance: With RenoFi loans, you can keep your existing mortgage and its low rate intact while accessing funds for your renovation. This is a huge benefit if you’re locked into a favorable rate and don’t want to refinance.
• Streamlined Process: Unlike other loans, RenoFi loans don’t require complicated draw schedules and inspections. This makes it easier to start and complete your project on time.

Choosing the right home renovation loan can make or break your project. While traditional loans like HELOCs, personal, and FHA 203(k) loans have their place, they often come with limitations that can restrict your renovation plans. But RenoFi loans give homeowners a unique and flexible alternative. 

By leveraging your home’s after-renovation value, RenoFi allows you to borrow more without the need to refinance your existing mortgage or deal with complex draw schedules and inspections. Therefore, if you are a homeowner looking to maximize your renovation potential, RenoFi loans are the best choice.

Unlike traditional loans, which are based on your current home value or require you to refinance, RenoFi loans are based on the after-renovation value of your home. This allows you to borrow, on average, 11x more, get a low monthly payment, and keep your low rate on your first mortgage.

Explore your RenoFi loan options here.