Texas FHA Loan
When buying a home in Texas, an FHA loan offers some advantages. For good reason, it is a popular choice for first-time buyers, but this doesn’t need to be your first property to benefit from this government-backed loan program.
Features of the FHA Mortgage Program
Created and insured by the Federal Housing Administration, FHA loans are designed to help more Americans become homeowners. They make it easier for buyers to prepare their finances and have less restrictive demands that make qualifying easier.
Minimum Down Payment
Something that can hold back buyers from making their first home purchase is saving for a down payment. If you are already paying rent, finding extra money in your budget to put aside for a down payment can be a challenge. The FHA allows buyers to qualify with as little as 3.5% of the purchase amount as a down payment.
Gifts from family members are also allowed, reducing the amount of time you will need to wait before buying your home. If you do receive a gift to help with your down payment, this has to be documented and a gift letter provided. During underwriting, the lender will want to see evidence that the money has been transferred from the gifter’s account.
FHA Non-Occupant Co-Borrowers
When you first buy at home it can be particularly difficult to qualify for the loan you want without much credit history. One of your relatives could help with this by becoming a non-occupant co-borrower.
As long as your relative has good credit and is not ineligible for an FHA loan, they could help you purchase a home sooner. They will have to sign mortgage documents and take title to the home, being responsible for the mortgage payments as much as you are.
When your relative enters into an arrangement like this, their debt-to-income ratio will be combined with yours. This can improve your situation when you have debts that are more than 43% of your income when the new house payments are included.
FHA Minimum Credit Score Requirements
The FHA has made it easier for people with flawed credit to qualify for a home loan. If you haven’t been able to qualify for a conventional mortgage the FHA offers an easier path to homeownership.
Even with an average credit score, you might still qualify for the loan you want. With a score of above 500, it can be possible to qualify though you will need a 10% down payment. The FHA requirements mean that you will need a score of 580 if you want to pay a 3.5 percent down payment.
It should be noted that these are the absolute minimum score requirements, and lenders can set their own minimums. This is commonly known as mortgage overlays in the industry. This could mean you need to do things to improve your credit score before you apply.
Debt-to-Income Ratio
When applying for an FHA loan, the lender will consider the borrower’s debt-to-income ratio. Debt-to-income is the amount of debt you have compared to your gross income.
Generally, the FHA lender will not want to see that you have more than a 43% debt-to-income ratio. However, lenders can permit borrowers to carry more debt if they have a great credit history or have substantial cash reserves.
If your monthly gross income is $6,000, 43% would mean debts of $2,580 per month. However, your potential mortgage payments are included in this calculation which could mean you must deal with some of your debts before you consider applying.
When Should You Choose an FHA Loan?
If you don’t have a great credit score or a financial history to show lenders that you are a good risk, an FHA loan might enable you to purchase a home when a conventional mortgage is unavailable.
If you don’t have any cash reserves, beyond money saved for the down payment, choosing an FHA loan might be better than a conventional loan. Should the idea of a non-occupying co-borrower appeal to you, an FHA loan might just be the perfect solution for your circumstances.
The FHA loan requirements could also mean that you won’t need as much money for the down payment, but it won’t suit everybody buying a home in Texas.
Mortgage Insurance Premiums
When you purchase a home with a down payment of less than 20%, you will need to pay private mortgage insurance with a conventional loan. There is a similar situation with FHA loans, which include an upfront mortgage insurance premium, and ongoing premiums that are added to your monthly payment.
An FHA upfront insurance premium will cost 1.75% of the mortgage amount which can be financed into the loan amount. The annual insurance premium is typically 0.55% of the loan amount and can vary depending on your loan-to-value ratio and the size of the mortgage. The annual premium is divided by 12 and paid as part of your loan payment.
The FHA requirement for an upfront insurance premium is a downside when compared to conventional loans. FHA insurance premiums are often required to be continually paid for the lifetime of the loan, depending on how much you put as a down payment.
FHA Loan Requirements
If you want to finance your purchase with an FHA loan, the property will have to be your primary residence. You cannot use this type of loan to buy vacation or rental properties.
The FHA allows the purchase of the following types of homes:
- Single-family homes
- Condominiums
- Duplexes – you must live in one of the two units
- Triplexes – you must live in one of the three units
- Quadplexes – you must live in one of the four units
If you want to buy a condo, it can be more difficult than other types of homes. The condominium development must meet the FHA’s financing guidelines, which can require extra paperwork and be more complicated.
If you do use an FHA loan to buy a multifamily property, the rental income from the other units can be used to help you qualify. The loan limits for buying these multifamily homes are also larger than single-family homes.
FHA Appraisals
If you want to purchase a home using an FHA loan, the property will have to be appraised to ensure it meets HUD guidelines. The appraisal will also find how much the home is worth, using comparable sales information.
The appraisal serves two purposes; to protect the buyer from buying a home requiring too many repairs, and to protect the lender from loaning more money than the home is worth. If the appraiser finds that many things need to be repaired, the home will not qualify until these are dealt with.
The appraiser will inspect the property looking for potential issues. Some of the basic requirements include the following areas:
Foundation
If there are issues with the foundation, like the home not being centered on the foundation correctly, it could mean the end of the loan process. However, many other issues can be repaired, allowing underwriting to proceed.
Drainage and Grading
Checks will be made to ensure that water is being correctly drained away from the home. Gutters and downspouts can leak allowing water to damage the property.
Water can pool next to the house and cause serious damage if the grading of the yard doesn’t help water flow away.
Air Conditioning and Heating
While the FHA guidelines don’t require a central air conditioning system, if there is one in the home it must be working. Each room in the home has to have a source of heat, allowing the room to be maintained at a comfortable temperature.
Plumbing
The home has to have sufficient fresh water, hot and cold, supply to the bathrooms and kitchen. This water also needs to drain away without any indication of leaks.
Wiring
A visual inspection will be made of the wiring, fuses, and outlets, and if there are signs of fraying or damage repairs will be needed.
The Roof
Replacing the roof is an expense that new homeowners will want to avoid, so an assessment is made on the life span remaining. The appraiser will also check for damage and signs of leaks.
Basement
For homes with basements, the appraiser will look for excess moisture and problems that could affect the foundation. If there is a sump pump, this will be tested to ensure it functions correctly.
Termites
If termites are allowed to thrive within a home, it can be disastrous to the structure. The appraiser will look for indications of this pest, and if anything is found a more specialized inspection might be required.
If there are issues found with the home that need to be repaired, this has to be completed before the sale can close. It will usually be the responsibility of the seller to pay for these repairs. Negotiations on the price might be needed to account for the repairs required.
Summing Up Qualifying for an FHA Loan in Texas
If your credit score isn’t the best and you want a home loan with lower down payment requirements, an FHA loan might be the right option. When buying a Texan home their more flexible approval rules remove some of the issues buyers can face when applying to a lender.
