The Federal Housing Administration insures home loans made by banks and other private lenders, both to buy houses and to renovate or improve them. There are two basic types of home improvement loan: a home equity loan or a home equity line of credit. An equity loan is for a fixed amount and fixed term. A line of credit is flexible, so funds can be taken out only as needed.
Use an FHA-Approved Lender
Approach your current mortgage holder or any other approved FHA lender about a line of credit. You will need to establish an amount. FHA lines of credit are limited to $25,000 for a single-family house. Interest rates are usually variable, based on the federal prime rate, and will vary among lenders. Go through regular lenders, not contractors or services that may offer loans.
Set Limits and Terms
Complete an application setting the limit on the loan and defining the interest rate and payment terms. The FHA requires any loan over $7,500 to be secured with some type of lien on the house. Payment terms vary; you usually are required to pay at least the interest on the loan amount every month but typically can vary payments on the principal.
Get a Time Limit
Some lines of credit are "balloons," in which you make no monthly payment on the principal but must repay the entire balance at the end of a fixed term. FHA lines of credit are limited to 20 years, but lenders usually set shorter limits, typically about 10 years. Specific time limits are between you and the lender, subject to basic FHA guidelines.
Take Only What You Need
You withdraw money from a line of credit as you need it, rather than getting the entire amount in a lump sum. You pay interest only on what you have taken out. In other words, if you have a $10,000 line of credit but withdraw only $5,000 to pay a contractor, you owe interest only on $5,000. If you repay $1,000 of that the next month, your principal drops to $4,000 for interest calculations.
- FHA Home Loans: FHA Home Loans
- FHA Government Loans: FHA Home Equity Loans
- Buy Your Home Guide: Tapping Home Equity
- National Association of Home Builders: Financing Your Home Remodeling Project
- The Truth About Mortgage: Home Equity Line of Credit
- The Mortgage Professor: Financing Home Improvements
- HUD: About Title I Home Improvement Loans