Title One loans make it easier to finance home
One home improvement loans seem to
be going the way of the dodo, judging from recent volume. Lenders
say proposed changes to the Department
of Housing and Urban Development program will only make things
But borrowers looking for a smart way to finance
renovations during the busy spring and summer season may not want
to write the loans off as quickly as lenders seem to be. 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.
"If you were to buy a house, like your first
home, and you kind of stretched to get in, this loan is there to
make the house that you bought, which may not be the home of your
dreams, better," says Mike McGuire, president of Firstplus
Bank in Tustin, Calif. "You can improve it to make it far more
yourself and add your personal touch."
comes and goes
Title One 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 One 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 One
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. Title One loans can be in any lien position,
too. That means somebody with first and second mortgages already
could still get a HUD renovation loan if sudden repairs were necessary.
Lenders can't charge more than five points,
or 5 percent of the loan amount, in fees on Title One 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 One loans as they are with some other financing options.
"You've got somebody who might be living there
that just moved in as a candidate or somebody who's lived there
for a while," says Skip Schenker, assistant vice president of National
Pacific Mortgage in Anaheim, Calif. "The benefit is that you
don't have to have an appraisal and you can improve the value of
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 One loans in 1996 for $1.4
billion, up from almost 48,000 loans for $375 million in 1988. But
since then, volume has plummeted. Only 26,000 loans for $380 million
were underwritten last year and the numbers look even worse so far
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 have taken the bait, too, because they can
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.
"Some of the (HUD) rules and the criteria are
a bit antiquated in today's market vs. the conventional home-improvement
market," says Mike Yuhas, vice president of indirect consumer lending
Savings Bank of Harrisburg, Pa.
"Title One was the mainstay for a long, long
time and it was the only option that was out there probably until
about the late 1980s," he adds. "What has happened more recently,
over the last five, six years, is the high-LTV market developed."
Scandals in the dealer loan portion of the Title
One program haven't helped 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 anyway.
As Peter Bell, the executive director of the
Improvement Lenders Association in D.C. explains, Title One
rules require a borrower to inspect the contractor's work and sign
off on it before that dealer gets any money from the indirect lender.
The lender has to send a professional inspector to review the job,
too. But the professional inspection can be performed as many as
60 days after the money is disbursed. So, scammers had a chance
to profit and split.
response was to propose tighter restrictions on dealer loans.
They even discussed eliminating that portion of the program in favor
of direct-to-consumer loans. While that didn't happen, lenders say
the hard-line approach scared many companies away from the program.
"The Secretary of HUD had a rule published to
abolish the dealer part of the program," Yuhas says. "They never
followed through with the action but when you send those type of
signals in the marketplace, nobody has confidence. Lenders, dealers
-- they all realize that it's on thin ice."
it's a cost-effective way to borrow
Yet for all the headaches it's caused industry participants,
the Title One program still offers consumers a cost-effective way
Schenker of National Pacific points out that
homeowners can get rates in the 10 percent to 12 percent range on
Title One loans vs. 12 percent to 14 percent for non-government,
high-LTV loans. Private lenders sometimes charge as many as 10 points,
too, double what HUD allows. Consumers can't use Title One 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 One
loans though. It comes to one-half of 1 percent of the loan amount,
multiplied by the number of years the loan will be outstanding.
That means somebody borrowing $10,000 on a 10-year term would have
to fork over $500 in small monthly increments tacked onto their
monthly payments. But because there's no need for an appraisal,
the consumer catches a closing cost break with a HUD-backed loan.
in the wind
Still, it's unclear how long Title One loans will be available
in their current form and whether they'll remain a good deal.
making its way through Congress may boost the loan limit to $32,500
from $20,000, for example. But a new
set of rules proposed by HUD could boost the insurance fee to
1 percent of the loan amount. Those rules could also make it so
that loans for more than $7,500 would have to be at least in second
lien position. Consumers who borrow more than that amount directly
would have to get their money via multiple draws, too, rather than
in one lump sum payment.
The inspection process may be changed as well.
The proposal would require either two or three reviews be performed,
depending on the loan amount, instead of one. Lenders who make loans
through dealers would have to conduct a telephone interview with
the borrower before releasing money to the dealer, too.
The HUD rules, which the agency introduced at
the end of March, are in a public comment period until May 30. Lenders
complain they'll all but wipe out dealer loans by making them too
expensive and cumbersome while the government says the changes would
make consumers safer from fraud. For now, though, consumers will
be able to borrow as before.