A mortgage insured by the Federal Housing Administration can help you buy a home with less-than-perfect credit and a down payment as low as 3.5%. The government backing of these loans allows lenders to offer financing to borrowers who may not qualify for conventional mortgages. While the FHA Loan program is popular among first-time home buyers, you can use this type of mortgage even if you’ve been on the market for a home before.
The federal government started the FHA mortgage program, which originally required a 20% down payment, in 1934 with the National Housing Act. FHA loans may have fixed or adjustable interest rates, and you can choose either a 15-year or 30-year mortgage term. Currently, the average APR for an FHA loan is slightly lower than the interest rate for a conventional mortgage. Review the requirements for an FHA loan to determine whether you qualify for this type of financing.
Texas FHA Loan Requirements
- Credit Score and Down Payment Requirements
You must have a credit score of at least 580 to qualify for a Texas FHA loan to take advantage of the 3.5% down payment. However, the FHA program accepts applicants with credit as low as 500 if you make a down payment of at least 10%.
In addition to your credit score, an FHA lender will review your entire report to determine whether you can make your monthly mortgage payments. Possible red flags include a history of foreclosure, bankruptcy, collections, or late payments. However, you can potentially qualify for an FHA loan at least two years after a Chapter 7 bankruptcy or when three years have passed after a foreclosure. With a Chapter 13 bankruptcy, you can potentially get an FHA loan right away with approval from the court trustee assigned to your case.
You can use your savings, a gift from a family member or friend, or an assistance grant to make your down payment. For example, the Texas Department of Housing and Community Affairs provides access to down payment and closing cost assistance programs for qualifying applicants, while the Veteran Land Board Housing Assistance Program has similar assistance for Texas residents who are veterans.
If you plan to buy a home in the city of Houston, you may qualify for up to $30,000 in assistance from the Housing and Community Development Department. The program provides a no-interest loan that the city will forgive after five years of on-time mortgage payments. To be eligible, you must be a first-time homebuyer with an income of no more than 120% of the area median, currently up to $66,550 per year for a single-person household.
While FHA requires a down payment, you may be able to get a federally-backed mortgage in Houston with no money down. The U.S. Department of Agriculture (USDA) offers zero-down loans in certain rural zip codes, while the Veterans’ Administration has zero-down loans for those who currently or previously served in the military.
Income and Debt Requirements
You must provide proof of steady income and employment in your FHA loan application, but the agency does not have specific maximum and minimum income requirements for this mortgage program. During the application process, you will submit paycheck stubs and tax filing information.
FHA requires a debt-to-income (DTI) ratio of around 55%. That means if you earn $3,000 monthly, you must have no more than $1,500 in debt payments. You can calculate your own DTI by adding all your monthly debt payments then dividing by your monthly pre-tax income.
Many borrowers wonder how FHA handles student loans. If you are currently repaying your education loans, the lender considers your monthly payments when calculating DTI. If your student loans are currently deferred, the lender estimates your future monthly payments at 1% of the borrowed amount for DTI purposes. In other words, FHA underwriters calculate $30,000 in deferred student loans as a $300 monthly debt.
FHA Mortgage Limits
If you’re looking for an FHA loan in Houston, you should review the agency’s maximum mortgage limits for Harris County, Texas. In 2022, you can take out an FHA mortgage in Houston of up to:
- $420,680 for a single-family home.
- $538,650 for a two-family home.
- $651,050 for a three-family home.
- $809,150 for a four-family home.
The Department of Housing and Urban Development (HUD) revises these limits each year.
Mortgage Insurance Requirements
You also have to pay two different types of mortgage insurance for an FHA loan. The first type, called an upfront mortgage insurance premium (UFMIP), is incorporated into the total amount of your loan. UFMIP equals 1.75% of your mortgage amount or $3,500 on a $200,000 FHA mortgage.
These charges represent part of your closing costs, which can total up to 6% of the mortgage. You must pay closing costs at settlement, but the FHA allows you to use a seller assistance grant of up to 6%.
The monthly mortgage insurance premium (MIP) is about 1% of the loan amount. This payment lasts for the life of the loan unless you put down at least 10%, in which case you must pay an MIP for 11 years.
Conventional loans also require mortgage insurance for a down payment of less than 20%. In addition, these lenders may charge higher mortgage insurance rates if you have a lower credit score.
Additional FHA Loan Requirements
FHA borrowers must live in the United States legally. Your lender will require proof of a valid social security number.
To use the FHA program, you must plan to live in the property as your primary residence. The home in question can be a single-family home, townhouse, condominium, or small apartment building with up to four units. After two years of paying your FHA mortgage, the lender can allow you to convert the home to a rental or vacation property.
During the mortgage underwriting process, you must have an appraisal of the property done by an FHA-approved professional. He or she must certify that the home meets the agency’s requirements for structural soundness, security, and safety. The seller may need to make repairs before moving forward with your offer based on the results of the FHA appraisal.
Condo units are subject to special FHA requirements. Specifically, you must prove that a certain percentage of the building’s units are occupied by owners rather than renters. The lender may also review the condo association’s books to make sure the development is financially solvent.
Other FHA Programs
While these requirements for an FHA loan apply to the agency’s standard home purchase program (a section 203(b) loan), you can also consider other types of FHA mortgages. Popular options include:
- The FHA streamline refinance. This program allows borrowers who already have an FHA loan to refinance with more favorable loan terms, such as a lower interest rate. The application requires limited documentation as long as you have a history of on-time payments on your existing mortgage. However, you cannot take cash out with this type of refinance.
- The FHA reverse mortgage. This option allows borrowers ages 62 and older to receive cash for a portion of their home equity. Eligibility for this product, called a home equity conversion mortgage, depends on the interest rate of your current mortgage and the appraised value of the property, which must be your primary residence.
- The energy-efficient mortgage program. With this program, you can finance the cost of green home improvements, such as solar panels along with your FHA mortgage.
- The FHA 203k loan. This loan combines a purchase and renovation loan. You can use this type of funding to make up to $30,000 in improvements to an eligible property.
- The FHA 245a loan. This loan features low monthly payments that increase over time. You might want to consider this program if you expect your income to grow significantly over the years.
The FHA 251 loan. Designed for borrowers who want an affordable interest rate, this mortgage adjusts after three, five, seven, or 10 years.
FHA LOAN FAQ
What are the requirements to get an FHA loan in Texas?
Credit requirements may vary from lender to lender in Texas, but generally credit scores of 580 or higher, stable monthly income, a 3.5% down payment, and a debt-to-income ratio (DTI) no higher than 56.99% are required for an FHA loan.
What will disqualify you from an FHA loan?
Common reasons borrowers may not qualify for an FHA loan include sub 580 credit scores, lack of consistent employment history, recent bankruptcy or foreclosure, and a high debt-to-income ratio (DTI).
What is the FHA loan limit in Texas?
As of 2023, the maximum FHA loan limit in Texas is $472,030
Is it hard to get approved for a FHA loan?
When compared to a Conventional Loan, and FHA loan is often easier to get approved for as it has more flexible credit requirements, more lenient debt-to-income ratios, and in most cases, lower down payment and closings costs.
Do you have to be a first time home buyer to Qualify for an FHA Loan?
No, you do not have to be a first-time homebuyer to qualify for an FHA loan. While FHA loans are often associated with first-time homebuyers due to their relatively lenient credit and down payment requirements, they are available to a wide range of borrowers, including those who have previously owned homes. However, there are certain eligibility requirements and restrictions that you must meet to qualify for an FHA loan.
Next Steps to Obtain an FHA Loan
An FHA mortgage might be right for you if you have steady income but only average credit and limited down payment savings. Keep in mind that these are the minimum requirements you’ll need to obtain an FHA loan. Individual lenders that provide FHA mortgages may have their own requirements for approval. HUD maintains a list of approved lenders where you can start your search for an FHA mortgage in Texas.
After you submit an application, FHA lenders must respond to either reject your request or provide an approval estimate within three business days. If you qualify for a loan with an FHA mortgage company, the lender will provide a preapproval letter that serves as proof you can obtain financing. It includes the address of the property, the amount of your down payment, the total amount of the loan, the specific FHA program, the interest rate, and the total purchase price of the home.
If you aren’t sure whether you meet the requirements for an FHA loan, you can speak to a HUD-approved housing counselor. He or she can provide advice based on your specific financial situation, including methods to improve your credit to qualify if necessary.
What are the requirements for an FHA Loan in Texas? | Rock Mortgage — Houston, Texas