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.
Mortgage Insurance for FHA 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 pay 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.
There are two different types of mortgage insurance premiums:
- Upfront mortgage insurance premium (UFMIP). The UFMIP amount is a percentage of your loan, and you must pay this premium upon signing for your loan.
- 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.
FHA Loan Income Requirements
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 mortgage payment, and property taxes.
- 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.
Limits of FHA Loans
The maximum amount of your loan depends on the location of the property. These limits vary considerably between low and high-cost areas throughout the United States. In 2023, the loan limit in a low-cost area for a single-family home is half the limit for the same size unit in a high-cost area.
So, when shopping for a home, a high-cost area could result in approval for a bigger loan.
Types of Home Loans
While usually FHA loans are used to describe a single type of mortgage, there are several types of loans under the FHA loan umbrella. When you work with a mortgage lender, you will learn the following:
- Which type of loan is the best for your situation
- Which loan offers the lowest monthly payment
- Which loan requires the smallest upfront payment and more
Basic Home Mortgage 203(b)
The Basic Home Mortgage, or 203(b), suits most borrowers. They are available for single-family homes or multifamily units. If your credit is below 580, you may still qualify if you can provide the maximum down payment.
FHA 203(k) Rehab Mortgage
If the home you wish to purchase needs repair, consider a rehab mortgage or 203(K) to finance up to $35,000. You will qualify if the property is above the threshold to renovate. However, a lender will require a detailed summary of needed repairs along with an official cost estimate with your application.
A rehab mortgage loan could cover the following aspects:
- Floor improvement or repair
- Outdoor landscaping
- Roof replacement
- Mold eradication
- Accessibility features for disabled family members
After a professional inspects your home for needed repairs, you can discuss all your needs with your lender. The official assessment will then determine how much money you can borrow for the approved renovations. If your current home needs repairs you can’t afford, you may apply for a mortgage rehab loan to finance those repairs or get your home ready to sell.
Energy Efficient Mortgage
With the energy-efficient mortgage option, the borrower will benefit from making environmentally friendly improvements to the home. Older homes have character but tend to cost more in monthly utilities due to outdated plumbing and inefficient insulation. And skyrocketing monthly utility bills can get in the way of making your mortgage payment.
So, with the EEM option, you can update inefficient aspects of the property as part of receiving the loan. A professional home inspector will provide a list of possible improvement options, which could include installing solar panels or upgrading your HVAC unit. Many states also offer tax credits for installing efficient appliances.
Mortgage Insurance for Disaster Victims Section 203(h)
Texans who lost their home due to a major disaster may have a special FHA loan available to them with no down payment. While typical closing costs still exist, there is no down payment, and this particular vehicle is used to help disaster victims rebuild or buy a new home.
To qualify, you need to have lived in a designated disaster area where the previous home was destroyed. Keep in mind, Texans have one year from the date the government declared the disaster.
Good Neighbor Next Door Program
If you’re an eligible worker, including teachers and first responders, you can purchase a property at 50% off the listing price if the home is inside a designated revitalization area. With an FHA insured mortgage, you would only pay $100 in downpayment.
To qualify, you need to be a full-time employee and plan to remain so for at least one year post-close. You commit to living in the home for three years as your residence where you will re-certify this annually.
Down Payment Assistance Programs for FHA
First-time homebuyers often struggle to save money for a down payment. However, assistance is available when you qualify for an FHA loan in the form of a grant, which does not need to be repaid, or a loan. The price of the home is a factor in qualifying for down payment assistance and may vary depending on the location and the assistance program.
There are also income limits when qualifying for down payment assistance, and every person in your household who earns money will impact the assistance limit.
Technically, down payments can also be gifts when accompanied by an official letter from the gifting party. The letter must state the gift amount and that they do not expect repayment. Additional required paperwork includes the gifting party’s most recent bank statement and the deposit slip showing the down payment deposited amount.
Gifted down payments in the United States may come from various sources, such as a family member, a charity organization, or a government assistance program.
Refinance Your FHA Mortgage
Did you know that you can lower your monthly payment by applying to refinance your loan? And refinancing an FHA loan is just as easy. For this purpose, the FHA developed a refinancing program called the FHA Streamline Refinance, which is only open to FHA loan holders.
You can refinance your FHA loan without income verification or a home appraisal.
Prepayment Penalties
If you decide to sell your home or refinance before you repay your full FHA loan, you will not receive a penalty. The lack of a prepayment penalty is one of the main differences between FHA vs. conventional loans. It is possible to get a conventional loan that states you have no prepayment penalty, but negotiation often proves difficult.
You Can Have the Home of Your Dreams!
At Champions Mortgage, we believe anyone can afford the home of their dreams! So, if you thought that homeownership wasn’t an option for you due to low income or bad credit, that may not be the case. Why not call us for more information about whether you might qualify for an FHA loan based on the requirements discussed in this article?
Our loan officers at Champions Mortgage can walk you through all aspects of your FHA loan qualification, help you shop for lenders, and find the best deal. Have you previously tried to secure an FHA mobile home loan and not been successful? We will work with you to secure the best loan possible for your current situation.
Do you have questions about FHA loan requirements, home loans, loan taxes, or anything else? Contact the Champions Mortgage team at (281) 727-2500 today to chat with a knowledgeable loan officer about a hassle-free mortgage process for an FHA loan in Texas!
