What Is a Title II Mortgage?

Title II mortgages are any of several types of mortgages created under the provisions of the Federal Housing Administration's Title II program. They provide mortgage insurance issued by the FHA and may also include other costs that are not normally covered by mortgage loans, such as money to cover labor and materials for repairs to the home you buy.

To apply for a Title II loan, you need to have two years of steady employment or stable income and no past-due federal liens such as student loans or tax debts. Any court judgments against you must be paid, and all child support must be current. Your credit must have been stable or improving for at least the previous 12 months, and any bankruptcy filings must have been discharged for at least 24 months. Any foreclosures in your past must be at least three years ago, and you must have at least 12 months of on-time rent or lease payments.

Many single- and multiple-family homes qualify for Title II mortgages. In addition to standard homes, other residence types, such as condominiums, manufactured homes and trailers, may also qualify for Title II loans. The home must have a permanent foundation, meet minimum size requirements based on its residence type, and be structurally sound and fit for a family residence.

The FHA doesn't issue Title II mortgages directly. You need to check with lenders and find one that offers mortgage loans that are FHA-backed through the Title II program. The application process is similar to that of a standard mortgage loan, though the lender will check to be sure that the home you're buying meets Title II requirements. Interest rates are often lower than you would receive without using the Title II program, and your repayment term may last for up to 40 years. You still must pay closing costs on your loan.

Title II mortgage loans are protected by mortgage insurance issued by the FHA. This insurance reduces the risk the lender assumes when issuing the loan, since the insurance covers its losses if you default. Because of this insurance, Title II loans require as little as 3.5 percent of the cost of the home you're buying as a down payment. Since the insurance is issued by the FHA through an FHA program, the cost of the insurance is typically added to the mortgage so you won't have to pay a separate insurance premium.

One advantage of Title II mortgages is that the cost of repairing a "fixer-upper" can be absorbed into the mortgage. When taking out a loan for a home in need of repair, you can include the cost of materials and labor in the amount that you borrow and still have the full mortgage amount covered by FHA mortgage insurance. This is designed to encourage urban renewal and the purchase of properties with the intent of repairing and remodeling them as primary residences.

If a full loan payment would make your money a bit tight but you can reasonably expect your income to increase as the years go by, you may qualify for graduated loan payments on your Title II mortgage. Graduated payment loans start off with a minimal monthly payment, then experience an increase in payment amounts each year. As you continue to make more money, your mortgage payment will adapt until you're making a full payment each month.