Why are FHA loans such a great option for first-time home buyers in Texas? Firstly, applicants with low credit scores or even no credit still qualify as viable candidates for FHA loans. So, even if you have declared bankruptcy in the past or cannot afford a huge down payment, an FHA loan may be right for you. FHA loan requirements in Texas differ, so the best type of loan varies depending on the borrower. Lenders take into account your credit score, current income, and debt-to-income ratio.
In this post, Champions Mortgage will walk you through the FHA loan process step by step. We will help you determine if you qualify for an FHA loan in Texas and answer common questions along the way. We also provide information on all types of home loans so that you can choose what’s best for you and your family.
Affordable and Efficient Home Loans
The Federal Housing Administration originated after the Great Depression, as many Americans struggled to recover. The FHA was formed to provide solutions, aiming to help people secure a home loan even if they could not afford a large down payment.
Is your credit history not great? Do you have a very low income? You can still buy a home with the same FHA loans that have been helping families afford quality housing since 1934.
Affordable and Efficient Home Loans
When you qualify for an FHA loan, you secure money through a certified lender, as with any loan. However, the difference in an FHA loan is that it requires you to mortgage insurance premiums.
These premiums protect the lender in the event of default, where you cannot repay the loan. It is the borrower’s responsibility to pay the mortgage insurance premium, an added expense on top of the loan. However, this feature allows even people with low credit scores and minimal income a chance to own a piece of property.
The UFMIP amount is a percentage of your loan, and you must pay this premium upon signing for your loan.
Upfront mortgage insurance premium (UFMIP).
There are two different types of mortgage insurance premiums:
An annual premium.
The annual options are slightly lower percentages than the UFMIP but are due each year as you pay off the loan. The annual premium typically decreases as your principal amount decreases.
Countless financial establishments offer FHA loans, so shop around for the best rate. It’s also a great idea to meet with several lenders before signing a loan to ensure you secure an arrangement and fees that best fit your situation.
Qualifying for FHA Loan
An FHA loan in Texas is relatively simple to secure. However, all applicants will have to go through an approval process. Most lenders you select will look at a few things when seeing whether you qualify for their FHA home loan, including the following:
- Proof of employment for the past two years
- No foreclosures in the past three years
- A credit score of 580 or higher
FHA loans only apply if the property is the buyer’s primary place of residence. Secondary homes or rental properties do not qualify. However, it is possible to buy a multi-unit home with the intent of living in one unit and renting out the others (in all areas of the United States, including US territories and the District of Columbia).
Do you meet all criteria but have no credit? Don’t let that deter you from applying for an FHA loan. HUD forbids lenders to deny an applicant just because they do not have any credit history, so each loan application must take the borrower’s unique circumstances into consideration.
How much is the down payment? There’s a minimum percentage of the sale price due, but your credit score will largely determine the final down payment cost. If your credit score is 580 or higher, your down payment will be at the minimum percentage, but if it is lower, your down payment could be three times that amount. Specifically, if you have a minimum 500 credit score expect a 10% down payment vs 580 and above credit score and only a 3.5% down payment.
Most borrowers are pleased to hear that there are no specific income requirements to qualify for an FHA loan. However, the FHA ensures you can afford the loan by examining your income over the past two years and calculating your debt-to- income ratio (DTI).
Your total monthly bills divided by your gross income equals your DTI ratio. The lower your DTI ratio, the better
candidate you are for an FHA loan.
Types of DTI Ratios
There are two primary debt-to-income ratios a lender could assess: front-end and back-end.
- The front-end ratio looks at your monthly expenses for home-related bills. This may include homeowner’s insurance, your
- The back-end ratio looks at home-related expenses combined with other recurring bills, like loans, car payments, and credit card debt.Both of these calculations set a limit on the ideal debt-to-income ratio for qualifying candidates.
FHA Credit Requirements
Essentially, credit history is an indicator of your responsible financial habits. Though FHA loans are available to those with low credit scores, there are a few things the lender will look at when examining your credit.
- Overdue Bills.
If you tend not to pay your bills on time, it will show up on your credit report. Tardy or delinquent payments follow you throughout the homebuying journey. Any lender will look for at least a year of timely payments with all recurring bills.
- Foreclosure.
A recent foreclosure may prevent you from securing an FHA loan right away. However, if you have a foreclosure on your credit report, but it is more than three years old, it is likely it will not work against you during the application process.
- Bankruptcy.
You are still a good candidate for an FHA loan, even if you have had to file for bankruptcy. If two years or more have passed since the bankruptcy, you can still secure a loan. One tip is to re-establish credit as soon as possible to expedite your application.
- Other Outstanding Debt.
Do you have any bills in collections or owe other money, such as child support? You may have to pay those debts before receiving approval. Outstanding debt works on a case-by-case basis.
