Citing remodeling industry surveys that point to the growing desire of homeowners to make their residences more energy efficient, the federal government has rolled out a pilot program to help people pay for replacement windows and doors, water heaters, solar panels, even geothermal systems.

Backed by the Federal Housing Administration (FHA), the new PowerSaver loans will offer financing of up to $25,000 to an estimated 30,000 owners to upgrade their homes. But that is only a drop in the proverbial bucket compared to the huge number of people who want to make home improvements of all kinds, not just those that will lower their utility bills.

According to the Joint Center for Housing Studies at Harvard University, the home improvement business is poised for a decade of growth after being decimated by a double-digit decline in spending since 2007. “As both the economy and the housing market stabilize, so, too, will homeowner improvement spending,” says Abbe Will, a researcher with the center’s Remodeling Futures Program.

Over the coming years, the center says in its latest report, “A New Decade of Growth for Remodeling,” expenditures are expected to increase at an inflation-adjusted average of 3.5 percent annually. That’s below the pace recorded during the housing boom, but it’s still sharply above the rate notched during the crash.

The report says that market fundamentals—the size of the nation’s housing stock, the age of those homes, and the income gains of their owners—all point to increases in remodeling spending. It also says that owners will turn their focus away from upper-end discretionary projects to replacements and systems upgrades, presenting remodelers and contractors with any number of growth opportunities.

Mintel, a market research firm, also sees a big jump in remodeling activity. Noting that 39 percent of the owners polled in a recent survey believe that making a major home improvement is the best investment they can make, William Patterson, a Mintel senior analyst, is forecasting growth to accelerate this year and—presuming a further stabilization in the housing market—to remain positive through 2015.

But that same Mintel study also generated some disturbing findings—namely, that a good many owners don’t have the money to pay for what they’d like to do to their homes. And therein lies the rub: How are people going to pay for the improvements that all the research suggests they will undertake? After all, most owners can no longer raid their home-based piggy banks like they used to.

According to the Federal Housing Finance Agency, owners lost more than half their equity between 2006—the year when the housing market began its free fall—and 2009. (That’s the year when the economic recession ended, but not the housing recession.) And according to some estimates, the bleeding hasn’t stopped yet, especially in markets where foreclosures and short sales still dominate.

Of course, those who have the wherewithal can always pay cash. And if their credit is still good enough and they have a strong, long-term relationship with their banks, they might even be able to take out a personal loan secured by their signatures alone.

Or, if they still have some equity left in their homes, they may be able to borrow against it. But that’s not nearly as easy as it was six or seven years ago. Indeed, home equity lending is far different from the go-go years, when lenders often were glad to lend more than 100 percent of a home’s value.

“It still exists. It’s not dead,” says Keith Gumbinger of HSH Associates, a New Jersey–based financial publishing company, of home equity lending. “But the terms and conditions are considerably tighter. Now you have to have a high FICO score and you can’t leverage like you used to.”

So, where does that leave improvement-ready homeowners and, just as importantly, if not more so, the builders, remodelers, and mono-line contractors who expect to service them?

The new FHA PowerSaver is certainly one option. But it is a narrow, two-year experimental program that is limited to cover just energy fixes and just to $25,000. Moreover, it is available only in certain parts of the country and just 18 lenders have signed on to participate.

The FHA also backs rehab loans of up to $25,000 under its Title One lending program. But for the big stuff, the only viable option is the FHA’s 203(k) rehabilitation mortgage. Under this program, practically anything goes. Borrowers can even tear down the whole house and start over. So it behooves contractors to learn all they can about the 203(k) program so they can present clients with a viable financing option.

While 203(k) loans can be used by homebuyers who want to do some work on their dream houses before they move in, they also can be used by current owners as a refinancing tool to incorporate the cost of their home improvements into a brand-new first mortgage. And business has been booming, according to the latest FHA figures.

In the 2008 fiscal year, the FHA insured—or, in government parlance, “endorsed”—just 6,756 203(k) loans for a volume of $940.6 million. But in fiscal year 2009, the agency insured 16,913 loans for a volume of $2.66 billion. And in 2010, it backed 22,476 loans for a volume $3.8 billion. Business is off somewhat through the first half of the current fiscal year, however: The agency insured just 9,526 203(k) loans between October 1 and March 31, for a volume of $1.62 billion. But those are still significant numbers.

With that in mind, the following is a brief synopsis of the 203(k) lending program:
The guidelines are extremely liberal. For example, there is no limit on how much an owner can spend on improvements. As long as the total loan amount does not exceed the FHA maximum, they are good to go. The current FHA ceiling ranges from $271,050 to as much as $729,750 in the country’s highest-cost areas.

On October 1, though, the ceiling in expensive markets like California and Boston is scheduled to revert back to the old maximum of $625,500. And the Obama administration has signaled that the high-cost ceiling may be whittled down even further. In addition, the FHA’s annual insurance premium will be increased 0.25 percent with the start of the next fiscal year.

As long as the “as improved” appraised value of the property—that is, the value of the house plus the value of the improvements—does not exceed the maximum loan amount, almost anything goes. Only luxury items are verboten, says Jim Ragan, who manages the 203(k) program for Bank of America Mortgage.

“You can’t build Bobby Flay’s outdoor kitchen or a swimming pool,” says Ragan, national renovation lending manager at Bank of America Home Loans. “But other than that, practically anything else is permitted.”

Actually, the extent of the project can range from something relatively modest to a virtual reconstruction; the cost, however, must exceed $5,000. But as long as the existing foundation remains in place, owners can start over practically from scratch by tearing down the house and rebuilding it. Even such soft costs as inspection fees, architectural fees, closing costs, and permits can be included.

Better yet, there is no requirement for a reappraisal once the work is finished; only a single upfront valuation is necessary.