What is a Federal Housing Administration Loan?
A Federal Housing Administration Loan, or an FHA loan, is a home mortgage given by a private lender with the approval and insurance of the Federal Housing Administration (FHA).
The FHA was created in 1934 during the height of the Great Depression, when mortgage defaults and foreclosures were commonplace throughout the country. It was designed to reduce lender risk at a time when loans were generally limited to only 50% of the property’s market value, which made it nearly impossible for many struggling Americans to even consider homeownership.
Today, the FHA loan helps low-to-moderate income families buy a home with a lower down payment and an easing of credit score restrictions compared to a conventional loan. Some lending institutions provide up to 96.5% of a home loan with a down payment of only 3.5% when applicants have a minimum credit score of 580, while lower credit scores (not below 500) will still qualify for an FHA loan with a 10% down payment.
How Does an FHA Loan Work in Texas TX?
An FHA loan is not issued by the Federal Housing Administration itself, but rather, is issued by an FHA-approved private lender such as a bank or mortgage company. With an FHA loan, the government guarantees the mortgage, thus reducing risk to the lender.
To receive an FHA loan, the loan recipient will be required to pay mortgage insurance premiums to the FHA. There will be two different FHA loan insurance premiums, one being an Upfront Mortgage Insurance Premium (UFMIP), and the other being an Annual Mortgage Insurance Premium (MIP).
As of 2020, the UFMIP on an FHA loan is equal to 1.75% of the loan amount, which can be paid at closing or rolled into the mortgage. The Annual MIP is to be paid monthly, and factors such as the loan amount, loan term, and loan-to-value (LTV) will be calculated into the rate. The Annual MIP is typically between 0.45% and 1.05% of the loan amount, and must be paid monthly for either 11 years or for the loan term depending on its length and the LTV.
Loan insurance premiums on a Texas FHA loan are generally tax deductible, however, they must be itemized to qualify.
Are There Other FHA Loans Types Besides a Traditional Mortgage in Texas TX?
Apart from the traditional mortgage, Texas FHA loans include several programs for the benefit of both homebuyers and homeowners, such as:
The Home Equity Conversion Mortgage (HECM)
This FHA loan is a reverse mortgage designed for the benefit of seniors aged 62+ whom wish to cash in their home equity while keeping their home title.
FHA’s Energy Efficient Mortgage Program (EEM)
This FHA loan allows borrowers to factor the expense of energy efficient upgrades into the loan, which are expected to reduce utility costs over time and release more income for mortgage payments.
Texas FHA 203(k) Improvement Loan
This FHA loan type allows borrowers to include repair and renovation expenses with their housing loan. Learn more about Renovation Mortgages.
Comparing the FHA Loan to a Conventional Mortgage
The main goal of an FHA loan is to assist low-to-moderate income families with the purchase of a home by way of a lower down payment. There are several differences between an FHA loan and a conventional loan which may facilitate a home purchase for those with low-to-moderate income, but which may also make a conventional loan preferable for those who can afford a higher down payment.
Credit Scores & FHA Home Loans
The minimum credit score for an FHA loan is 500.
Anyone applying for a conventional loan will be required to have a credit score of no less than 620.
Texas FHA Down Payment Requirements
Texas FHA loans include a down payment of only 3.5% for qualified applicants with a credit score of 580 or higher. You can still get an FHA loan in Texas TX with a credit score between 500 and 579, but the down payment will be increased to 10%. If your credit score is less than 500, you will be unable to qualify for an FHA loan.
Conventional loans typically include a down payment up to 20% of the loan amount.
FHA Mortgage Insurance Premiums
In the case of an FHA home loan, a lower down payment is made possible with mortgage insurance premiums paid to the FHA. This may work out for those who cannot afford a higher down payment, but may actually end up costing slightly more in the long run compared to a conventional loan. For these reasons, a conventional loan is recommended to anyone who can afford a higher down payment, as it can end up saving money across the loan term.
An FHA loan comes with an Upfront MIP of 1.75% of the loan amount. It also includes an Annual MIP of 0.45% to 1.05% paid yearly for 11 years or longer based on the LTV and loan term length.
A conventional mortgage does not include an MIP in the case of a 20% down payment. For down payments of less than 20%, an MIP may be included until the loan has been paid down to 78% of its LTV. Conventional loans also include Private Mortgage Insurance (PMI), which typically ranges from 0.5% to 1% of the loan annually.
Texas FHA Down Payment Gifts and Down Payment Assistance
FHA loans can include a 100% down payment gift as well as down payment assistance programs for qualified applicants.
With conventional loans, only a portion of the down payment can be made with a gift if the down payment is less than 20%. There is no down payment assistance program offered with a conventional loan.
Texas FHA Loan Qualifications
To be approved for an FHA loan, applicants must meet the following requirements:
- Credit score minimum of 500.
- No bankruptcy in the past 2 years, except for specific no-fault circumstances.
- No foreclosures in the past 3 years.
- No delinquency on federal student loans or income taxes.
- Working towards better credit.
- Strong employment history for the past 2 years, whether working for an employer or as self-employed (proof of self-employment history will be required in the form of tax returns, balance sheets, and profit/loss statements. Self-employed individuals with less than 2 years but more than 1 year of successful work history may still be eligible for an FHA loan dependent on overall work history).
- Possess a valid social security number, are of legal age, and are a lawful resident of the country.
- Applying for a FHA loan with an FHA-approved lender.
Other Important Considerations When Applying for an FHA Loan in TX
When applying for an FHA loan, the lender may also review an applicant’s financial history such as their rent and utility payments. The property for which the loan is being taken out must be a principal residence. FHA loans do not apply in the case of real estate investment or rentals.
In terms of gross income requirements, the front-end ratio, which includes mortgage payments and insurance, home insurance, property tax and HOA fees should be below 31%. The back-end ratio, which includes mortgage payments and consumer debt, should be below 43% of the applicant’s gross income. Under certain circumstances, ratios up to 50% may be approved.
The property in question must be approved by an FHA-certified appraiser and meet FHA loan standards. In some cases, repairs may be required to meet FHA standards, which may be done by the seller or paid for by the loan recipient at closing.
Closing costs for an FHA loan may be paid for in part by the seller, builder, or lender.
TX FHA Loan Limits
FHA loan limitations are determined by factors such as local property values and are generally limited to 115% of the US median home cost (this value is set by the U.S. Department of Housing and Urban Development). Some areas in the US and its territories that have high construction costs may qualify for a higher loan limit. Click the following link for the current California FHA loan limits.
Government Relief with FHA Loans
Unlike conventional loans, FHA loans may offer a lifeline in the case of financial difficulty such as job loss, difficulty making payments, or other. This may include loan relief programs such as the Home Affordable Modification Program (HAMP), which helps prevent foreclosure by reducing the cost of a monthly mortgage payment.
Texas FHA Mortgage FAQs
Do I Qualify for an FHA Loan in Texas?
To qualify for an FHA loan, applicants must meet the following requirements:
- Credit score minimum of 500.
- No bankruptcy in the past 2 years, except for specific no-fault circumstances.
- No foreclosures in the past 3 years.
- No delinquency on federal student loans or income taxes.
- Working towards better credit.
- Strong employment history for the past 2 years, whether working for an employer or as self-employed (proof of self-employment history will be required in the form of tax returns, balance sheets, and profit/loss statements. Self-employed individuals with less than 2 years but more than 1 year of successful work history may still be eligible for an FHA loan dependent on overall work history).
- Possess a valid social security number, are of legal age, and are a lawful resident of the country.
- Applying for an FHA loan with an FHA-approved lender.
Who Provides the FHA Loan, the Government or the Mortgage Company?
FHA loans are government-insured mortgages issued by FHA-approved banks and mortgage companies such as us, Only 1 Home Loans.
Can I Have an FHA Loan Cosigner?
Yes, provided that your cosigner is a US citizen or has a primary residence in the US.
Is it Possible to Remove the FHA Loan Mortgage Insurance?
Any FHA loan issued at less than 10% down payment includes mortgage insurance that must be paid for throughout the entire loan term. Loans issued at more than 10% down payment require mortgage insurance payments for 11 years only. To remove mortgage insurance, the FHA loan can be refinanced into a conventional mortgage.
I Am Not a First-Time Homebuyer. Can I Still Qualify for an FHA Loan in Texas TX?
Yes, you may still get an FHA loan even if this is not your first home purchase provided that you meet the qualifications.
Can I Make my FHA Loan Down Payment with a Gift?
Yes, FHA loan down payments can be gifted from a lender-approved source or donor.
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