FHA Title 1 Loans: What You Need to Know

Written by Elijah BishopReviewed by Nathan Brown, CFP®Updated: 4th May 2022
Share this article

Disclaimer: This post contains references to products from one or more of our advertisers. We may receive compensation (at no cost to you) when you click on links to those products. Read our Disclaimer Policy for more information.

Maybe you love your home but wish it has a bigger kitchen or bathroom. Or you want to make minor structural adjustments to make your home disability friendly.

In either instance, an FHA Title 1 Home Improvement Loan may be all you need. However, an FHA Title 1 loan comes with several strict requirements that make it unavailable to every homeowner.

Backed by the Federal Housing Administration, FHA Title 1 loan provides insurance to private lenders, giving them the confidence to offer homeowners loans for critical home improvements even with little to no equity in their home.

With that in mind, if it sounds like FHA Title 1 loan matches your home rehab needs, keep scrolling to learn more.

In this article, we’ll go over what this loan is all about, how it works, its pros and cons, and how you can qualify for one.

What is an FHA Title 1 Loan?

FHA Title 1 loan is one of the numerous ways through which the federal government helps low-to-moderate income homeowners finance critical home improvements and rehab.

FHA Title 1 loan is usually the go-to option for homeowners who do not qualify for a traditional home equity loan.

Funds received from FHA Title 1 loans can be used to rehab single-family homes, manufactured homes, multi-family homes, as well as non-residential properties.

In addition, borrowers may use the loan for site rehabilitation and the preservation of historic buildings.

According to the Department of Housing and Urban Development, FHA Title 1 loan can be used for anything that makes your home livable and more functional.

>> More: How FHA Loans Work

How Does an FHA Title 1 Loan Work?

Like other government-backed home loans, FHA Title 1 loans are insured by the FHA and offered by private lenders with their funds.

Typically, it is common for the federal government to guarantee losses of up to 90% of the loan amount.

When it comes to loan limits regarding FHA Title 1, the maximum amount you can borrow varies depending on the type of property you plan on improving.

However, it is essential to note that FHA Title 1 loans below $7,500 are usually unsecured. Like personal loans, you only need to guarantee them with your signature instead of the actual property.

Loans above the $7,500 mark will require using your home as collateral.

FHA Title 1 Loan Limits

The following section will outline the maximum loan amount and maximum loan terms for each property type when getting an FHA Title 1 loan.

Type of PropertyMaximum Loan AmountAvailable Loan Term
One Unit$25,0006 Months - 20 Yrs & 32 Days
Two Unit$24,0006 Months - 20 Yrs & 32 Days
Three Unit $36,0006 Months - 20 Yrs & 32 Days
Four Unit$48,0006 Months - 20 Yrs & 32 Days
Five + Units$60,0006 Months - 20 Yrs & 32 Days
Non-Residential Property$25,0006 Months - 20 Yrs & 32 Days
Manufactured Home Regarded as Real Property$25,0006 Months - 20 Yrs & 32 Days
Manufactured Home Not Regarded as Real Property$25,0006 Months - 20 Yrs & 32 Days
Historic PreservationLess of $15,000 per dwelling unit or $45,0006 Months - 20 Yrs & 32 Days
Fire Safety Equipment$50,0006 Months - 20 Yrs & 32 Days

More importantly, while it is possible to have one than one FHA Title 1 loan, the FHA rule stipulates that the total amount of all the loans must not exceed the maximum loan amount allowed for your property type.

FHA Title 1 Loan Requirements

To qualify for an FHA Title 1 loan, borrowers must meet specific requirements. It is common for lenders to request your social security number, pay stubs, and W-2 form to verify your employment and income.

Your lender may also request that you present your bank statement if you receive certain types of income like Social Security, Disability, and Pension.

Like the usual FHA loan, FHA Title 1 loan requires borrowers to pay for mortgage insurance premiums.

Typically, an annual FHA mortgage insurance premium of $1 per $100 of the loan amount will be either charged or added to your loan interest rate.

More importantly, the interest rate and origination cost are set by the lender. That’s why you must shop for more than one lender to find the best loan rates and terms.

FHA Title 1 Loan Pros and Cons

Here are some of the pros and cons associated with FHA Title 1 loan:

Pros

  • Flexible qualification requirements. One of the upsides to getting an FHA Title 1 loan is that it doesn’t require perfect credit scores. Also, many property types are available for financing.
  • No equity is needed. While many home improvement loans strongly consider the amount of equity a borrower has in their home, FHA Title 1 loans are available for homeowners with little to no equity in their homes.
  • Unsecured loan option. FHA Title 1 loans with a value of less than $7,500 are considered unsecured and do not require collateral. This means that your property is safe from foreclosure even when you default on the loan repayment.
  • Low-fixed interest. Since FHA Title 1 loan targets mainly low-income individuals, it offers one of the lowest fixed interest rates.

Cons

  • Must use an approved lender. Only FHA-approved lenders can offer borrowers Title 1 home improvement loans. So, if your current lender fails to make the list, you may have to search for a whole new lender.
  • Must pay for mortgage insurance premium. To protect lenders, the FHA requires borrowers to pay for an insurance premium. Typically, the FHA charges a 1% annual insurance premium or $1 per $100 borrowed, and borrowers have the option of paying for it separately or in exchange for a higher interest rate.
  • Must limit spending to critical repairs. Title 1 home loans can only be used for the repair purpose listed in the loan application.

How to Apply for an FHA Title 1 Loan

Like all FHA loans, FHA Title 1 loans are offered only by FHA-approved lenders. If you believe that getting an FHA Title 1 loan is best for your home rehab needs, the best thing to do is search the HUD Lender list to find a reputable lender in your local area.

Just like when applying for a new mortgage or doing a mortgage refinancing, you will need to fill out a paper-based or online application and submit the required documents.

Your mortgage lendermay also request information about the potential home repairs or improvements.

What Is the Difference Between FHA Title 1 and Title 2 Loans?

While the FHA insures both loans, their purpose, maximum loan amount, and requirements are quite different.

Below are some of the differences between FHA Title 1 and Title 2 loans.

FHA Title 1FHA Title 2
Title I loan is an FHA-insured home improvement loan that can be used to repair or improve an existing single-family structure, manufactured home, multi-family homes, and non-residential properties.FHA-insured 1st mortgage loan that a borrower can use to help purchase a home as a primary residence.
Title I home improvement loans are typically offered as 2nd mortgage loans and are available up to $25,000. FHA Title 2 loan nationwide forward mortgage limit "floor" and "ceiling" for a one-unit property in CY 2021 are $356,362 and $822,375, respectively.

How to qualify for an FHA Title 1 loan

If you’re applying for an FHA Title 1 loan, you must meet the following requirements to qualify:

  • The house must have been built and occupied for at least 90 days
  • You must have a debt-to-income ratio of 45% or less
  • You need to own the home or have a long-term lease
  • Not be a defaulter on another federally backed loan program
  • Be able to afford monthly payments on the loan.

Unlike many traditional home rehab loans, FHA Title 1 loan does not involve hard credit score checks, nor is it expected of potential borrowers to have equity in their homes to quality. This makes it an excellent option for individuals with a poor credit scores.

Can I combine a Title 1 loan with an FHA 203(k) loan?

Yes, combining your FHA Title 1 loan with your FHA 203(k) loan is very possible. When combining both loans, your FHA 203(k) will cover the house’s purchase price, while Title 1 will cover the repair costs.

However, please speak with an FHA-approved lender for guidance on combining both loan programs.

Bottom Line: FHA Title 1 Loans

An FHA Title 1 loan can be an excellent option if you are looking to finance necessary improvements to your home, especially if you haven’t built up equity in your home. It is also preferable for homeowners who do not qualify for home equity loans.

However, FHA Title 1 loans are insured by the FHA and come with a strict loan borrowing limit, it may not be ideal for individuals looking to carry out high-end renovations.

To that end, if you’re thinking of getting an FHA Title 1 loan to make your home more livable, you should speak to a local lender to help you decide if getting one is best for your present situation.

Elijah Bishop
Elijah Bishop

Elijah A. Bishop is a Senior Personal Finance Writer who has been writing about real estate and mortgages for years. He has a Bachelors of Arts Degree in Creative writing from Georgia State University and has also attended the Climer School of Real Estate. He also holds a realtor license and has been in and out of the US mortgage industry as a loan officer. Bringing over 15 years of experience, Elijah produces content that analyzes ethnicities, race, and financial well-being. His areas of expertise are mortgages, real estate, and personal loans.