One of the major challenges of first-time homebuyers in Texas is finding the right loan program for their new home purchase. If you are a home buyer with poor credit or limited cash for a down payment, a Federal Housing Administration (FHA) loan may be all you need to buy your dream home in Texas.
What is an FHA loan? An FHA loan is a type of mortgage issued by an FHA-approved lender and insured by the Federal Housing Administration. This type of loan program targets potential home buyers with poor credit or limited down payment. The FHA requires a minimum credit score of 580 and a 3.5% down payment.
In the following sections, you’ll learn more about FHA qualifications, loan requirements, down payment, and the pros and cons of applying for an FHA loan in Texas.
FHA Loan vs. Conventional Loan
While there are several loan programs in the US for home buyers, FHA and conventional loans are two of the most used loan options. Below is a detailed explanation of the differences between these types of mortgages.
| FHA Loan | Conventional Loans | |
| Insurer | FHA loans are insured by the Federal Housing Administration. | A conventional loan is a home buyers’ loan that isn’t offered or insured by a government entity. |
| Credit Score | Under the FHA loan, you need to have a minimum credit score of 580. | Conventional loans require borrowers to have a minimum credit score of 620. |
| Down payment | With an FHA loan, the minimum is 3.5% down, but 10% down if your credit score is below 580. | Conventional loans require a down payment of 3-20%, depending on the amount you put forward. |
| Occupancy | It must be owner-occupied. That is, you can “only” use it in the purchase of a primary residence. | It can be non-owner-occupied. You can use it in the purchase of rentals, vacation, or investment properties. |
| Loan Amount | For most counties in the state of Texas, the FHA lending limit is $314,827 for a single-family home. | The conforming loan limits in Texas can be as high as $510,400 for a single-family home. |
| Debt-to- Income | Generally pegged at 43 percent, but most lenders will offer you a loan with a higher DTI ratio. | Generally pegged at 45 percent. |
| Mortgage Insurance | You must pay mortgage insurance despite your credit score or down payment. | Only required if your down payment is below 20% of the home purchase price. |
Be sure to check-in with your local lender for their current rates and offerings.
FHA Loan Requirements
With millions of American homebuyers opting for the FHA loan program, the Federal Housing Administration has instituted a list of requirements to protect the program. To qualify for an FHA loan, you must meet the following criteria:
Minimum Down Payment Requirement
How much down payment do I need? FHA will allow you to do a minimum down payment of 3.5% if your credit score is 580 and above. But if you have a credit score of less than 580, you’ll be required to make a down payment of at least 10%.
Your down payment or closing costs may be gift money given to you by a close relative, employer, charitable organization, or close friends. Check out FHA’s guidelines regarding the use of gift money.
Credit Requirement
To qualify for an FHA loan in Texas, the FHA requires borrowers to have a minimum credit score of 580. While a credit score of 580 is the general requirement, some lenders may be willing to offer you a home loan even with a score of 500.
If you are applying for an FHA loan with a credit score below 580, you will most likely be required to pay a higher down payment and interest rate.
Income and Employment Requirements
There are no set requirements on the amount of income you should earn monthly or annually to qualify for an FHA loan. However, you must:
- Provide two years of employment history. Lenders want you to have a good two years in the industry. They want to be sure that you have stable work and income.
- Provide two years of income history. Lenders want to see two years of income history to determine what can be expected in the future.
You may need to speak to your local lender to determine your income, especially if you are self-employed, a sole proprietor, or a commissioned employee.
Property Requirement
When getting an FHA loan, your potential property must meet specific FHA requirements before you can be approved by your lender. These requirements include:
- The home loan must be for a primary residence, and you or one of the borrowers must reside in the property within 60 days of closing on the purchase.
- It cannot be used for an investment property.
- Your intended property cannot be a flip. That is, you cannot buy a home within 90 days of a prior sale.
- You must take up the property title in your name or the name of a living trust.
- The property must be a functioning home. It must meet the FHA appraisal minimum requirements.
- Your desired property must meet the required FHA loan limits for your county in Texas.
Speak to a local FHA lender for more information on FHA appraisal minimum requirement, loan limits, and exceptions.
Debt-To-Income Requirements
A debt-to-income ratio is a percentage lenders use in determining your mortgage payment, debts, and the amount of loan you can afford. FHA guidelines require that borrowers have a debt-to-income ratio of 43%, but some lenders may allow for up 56%. Your DTI is usually a combination of your front-end and back-end numbers.
The FHA stipulates that your front-end ratio should be around 31%-40% based on your credit score. When calculating your front-end ratio, the focus is on your housing-related debts.
For your back-end ratio, this is your total debts to your income. FHA guidelines require that borrowers fall within the 43%-50% ratio. Your back-end ratio is the primary factor lenders look at when determining if your income levels are high enough to qualify you for a specific loan amount.
Pros and Cons of Applying for an FHA Loan in Texas
| Pros | Cons |
|---|---|
| FHA loans require a low down payment. Generally, around 3.5%. You can fund your down payment or closing cost with gift monies from relatives and friends. | You must pay mortgage insurance for the life of the loan despite your down payment. |
| It is a great option if you have a bad credit score since you may qualify with a credit score as low as 500. | Strict restrictions on the types of properties that you can acquire. You may not be able to purchase a condo or a vacation home |
| Interest rates are generally better than conventional loans | There is a limitation on the amount of home you can afford based on your location. |
| More flexible when it comes to your debt-to-income ratio. You can go higher with an FHA loan. | Most sellers have a wrong notion about FHA loans. Some believe that FHA loans are inferior in comparison to other loans. |
Conclusion
FHA loans are a popular choice for homebuyers, especially first-timers. While it offers several benefits, it is worth understanding the pros and cons of FHA loans to see if they’re the best option for you.
If you’re looking to purchase a home in Texas with a low credit score and limited down payment, getting an FHA loan may be all you need to finance your new home. While an FHA loan boasts of excellent benefits, it is highly recommended that you discuss your situation with a credible local lender.
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