Homeownership is the cornerstone of the American Dream. It’s also a choice that comes with a host of financial benefits. Since 1934, the US Department of Housing and Urban Development’s FHA Loan program has been helping Americans access all the benefits of homeownership by insuring their mortgages.
Today, that assistance is just as relevant and necessary as ever. But who qualifies for an FHA loan in Texas? What do you need to apply for one?
Here’s what you need to know.
Mortgage Insurance Essentials
What is mortgage insurance? Why apply for an FHA loan at all?
Mortgage insurance is a secondary form of protection for lenders making mortgages to higher-risk borrowers. Borrowers agree to pay the lender for their mortgage. They also agree to pay a third-party for mortgage insurance.
In the event that the borrower defaults on their mortgage, the third-party insurer pays the mortgage lender a portion of the principle on the borrower’s loan. This reduces the lender’s losses. Knowing that they protected from loss makes it possible for lenders to give loans to borrowers they otherwise would not approve.
Income and Employment
The first step to qualifying for FHA loans in Texas is being able to prove that you are employed and have consistent income. Self-employment is fine, but applicants need to be able to show at least two years’ worth of evidence of consistent income.
Applicants who receive W2 tax forms can use those as proof of income. Applicants who do not receive W2s will need to provide their tax returns for at least the years preceding their application.
It is important to note that the FHA program does not count bonuses or overtime toward monthly income unless they have been consistent for the two years in question and are expected to continue for at least three more years.
Under FHA loan guidelines, individual lending companies set their own credit score limits for potential borrowers. While these minimums vary from lender to lender, HUD will not insure applicants with credit scores below 500.
A high credit score will make a borrower more likely to receive a loan. Higher scores also earn borrowers better lending terms. Applicants will need to work with the lender of their choice to get specific information on credit score limits and the loan terms available to them.
All applicants must be able to provide a downpayment to be eligible for an FHA loan. Downpayments “gifted” to applicants by family members or other parties are acceptable but must meet certain legal requirements.
Applicants with high credit scores must make a minimum downpayment equal to 3.5 percent of their total loan. Applicants with low credit scores must make a minimum down payment equal to 10 percent of their total loan amount.
HUD understands that owning a home comes with both predictable and unpredictable expenses. As a result, under FHA loan requirements applicants are not allowed to completely wipe out their savings and other assets to qualify for a loan.
The exact amount of assets that applicants need after their downpayment varies based on several different factors. In general, though, applicants must show that they have three to six months of their projected monthly mortgage payment in reserve in order to qualify for a loan.
Individuals must have several years of clean financial history to qualify for a loan.
Any bankruptcies on record must be two or more years in the past. Any foreclosures on record must be three or more years in the past. Exceptions may apply for applicants who can prove they were not at fault for the bankruptcies or foreclosures on their records.
Individuals who filed for chapter 13 bankruptcy in the past must maintain a clean and responsible financial history for between three and five years to qualify for a loan. Applicants with poor financial histories may need to provide higher down payments or accept higher interest rates to get approved.
Home Loan Limits
HUD places firm limits on the maximum amount of money applicants can receive in an FHA Loan. In most cases, the limit is set at 115 percent of the median home price in the county in which the home is located.
FHA loan limits for one-family homes in Texas average $331,760. In higher cost of living areas, that number can run as high as $765,600 for a single-family home.
The specific limits for each applicant will depend on the location of the home they intend to buy.
Other Requirements for Getting an FHA Loan in Texas
Individuals seeking FHA Loans must meet several other minimum requirements, as well. Applicants must:
- Be at least 18 years of age
- Be applying for a loan to purchase a property they will use as their primary place of residence
- Be legal American citizens
- Hold and provide a valid Social Security number
Applicants must select a home appraiser approved by HUD and have their prospective home inspected as part of the application process. The appraiser will assess the home’s value and safety. Hiring a private inspector to look for additional areas of concern is optional and at the discretion of the applicant.
FHA Loan applicants must also be willing and able to provide a range of documentation as part of the application process. This includes but is not limited to:
- A current and valid photo ID, such as a driver’s license
- A passport or Social Security Card showing their valid SSN
- Signed tax returns for at least the two years prior to application
- Proof of income in the form of W2s or paystubs
- Bank and retirement account statements
- Bankruptcy or foreclosure documents (where applicable)
- References from their current landlord (where applicable)
Lender representatives will help applicants identify all of the documentation they need and when it is due.
Find Out if You Qualify Today
Getting an FHA Loan in Texas can make your dream of owning your ideal home a reality. Contact us today to find out if you qualify for an FHA Loan and get information on how to begin your application.