The Federal Home Loan Bank Board has liberalized regulations governing home improvement loans by federal savings and loan associations.

Garth Marston, FHLBB chairman, said the revisions will permit member S&Ls to lend money for substantial alterations, repairs and improvements to houses. He said the revisions will enable lenders to defer the payment of a loan's principal until projects are completed. Improvement loans may now be combined with permanent, long-term loans on the dwellings, he said.

The purpose of the revisions, Marston said, is to encourage upgrading of existing housing in both urban and rural areas.

The regulations are expected to encourage S&Ls to make loans for improvements (at higher interest rates and for a shorter terms) on old or gutted dwellings. S&Ls may also combine the paperwork for an improvement loan with a commitment for a permanent loan (at a lower interest rate and for a longer term) on the dwelling after the work has been satisfactorily completed.

This procedure would allow the owner of an older dwelling needing improvements to make a down payment for the purchase and then get the construction loan to do the work. He or she would pay interest only on that part of the loan. Then, after the work was completed, the permanent loan would be sufficiently large to enable the owner to pay off the construction loan and have only one long-term loan on the dwelling.

An executive of a large, Washington-based S&L said that up until now, thrift institutions here have been making few home improvement loans because such loans are unsecured by mortgages.

Most home improvement loans in this area are now made by commercial banks and some credit unions, which may or may not use FHA insurance. The interest rates on home improvement loans are generally 1 to 3 percentage points higher than long-term mortgage interest rates and the pay-off period is usually three to five years.

In some cases, long-time owners of houses use use their built-up equity and increased property values to refinance for a large mortgage and take cash out of the new loan to pay for improvements. However, current mortgage rates are usually high than the existing mortgages on most houses. Thus, some owners have been reluctant to use that method to improve their homes.

However, the new FHLBB regulations are expected to aid persons who buy a house in need improvements and then get both the rehabilitation loan and permanent mortgage commitment in one package.