Texas FHA Loan Requirements - How To Qualify For An FHA Loan

Credit, Income, and Assets constitute a mortgage loan; all three must be present.

FHA loan is the easiest loan to qualify for. With a minimal down payment requirement of 3.5% and the down payment can be a gift from family members, it allows homebuyers to realize their dream of homeownership. However, borrowers must meet specific eligibility requirements to qualify for an FHA-insured loan. FHA loan requirements are straightforward and must be met by all applicants.

FHA loans are the best option for people who filed for bankruptcy or had a prior foreclosure. They are popular among first-time homebuyers who have not saved up significant funds to purchase a home.

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FHA Loan Requirements For 2024

Credit Score Requirement

FHA’s general guideline regarding a borrower’s credit score is a 580 mid-FICO score to qualify for an FHA mortgage loan. This guideline varies from one lender to another. Some big commercial banks require a minimum of 620, others all the way to 640 before they can extend an FHA loan. The FHA guideline of 580 is a requirement for the loan to be eligible for FHA insurance. Since FHA only insures the loan against future borrowers’ default and doesn’t originate the loan themselves, they cannot force a mortgage lender to extend an FHA loan to borrowers that fall below their set criteria. This is what’s referred to as an “overlay” by lenders.

Borrowers with a FICO score below 580 may still qualify for an FHA loan provided they come up with a minimum of 10% down payment. Certain restrictions will apply to these borrowers, but it is still more lenient than conventional loans and other types of mortgage programs.

Income Requirement (Debt-to-Income Ratio)

FHA has no set minimum income requirement to qualify for an FHA-insured loan. However, they require the buyer to make sure they can afford the mortgage they are applying for. This includes documenting a steady income for at least two years.

A borrower’s debt-to-income ratio is calculated based on income versus monthly debts. To calculate your DTI ratio, divide your monthly bills by your gross monthly income (wages before taxes). The result is the percentage of your debt-to-income. The lower the percentage, the less risky a borrower is, and vice-versa. The standard DTI ratio of an FHA loan is 31/43. The first ratio is the proposed monthly housing expense should not exceed 31% of the borrower’s gross monthly income. The second ratio of 43% is all the monthly debts, plus the proposed housing expense should not exceed 43% of the gross monthly income.

We can extend FHA loans to borrowers with a DTI ratio as high as 55% with an Automated Underwriting System (AUS) approval. We can offer an FHA loan with a DTI as high as 57% with compensating factors in certain circumstances.

Self-Employed Borrowers

A self-employed borrower must be in business for at least two (2) years. Their last two years’ personal and business tax returns will be required to calculate the monthly income. Also, a year-to-date Profit & Loss (P&L) Statement is required for all self-employed borrowers. If a borrower is in Sales or 30% of his income comes from straight commission, the same rule will apply.

Student Loans and FHA Loan

There is an important update on how mortgage lenders must calculate students loans for FHA loans that recently took effect. It affects how borrowers may qualify for an FHA loan, mainly affecting the borrower’s debt-to-income ratio negatively. Mortgage lenders must calculate the borrower’s student loan payment as follows:

The greater of 1 percent of the outstanding balance on loan, or the monthly payment reported on the credit report;
The actual documented payment as long as the payment will fully amortize the loan over its term. To put it into perspective, say a borrower has $80,000 in student loans on an income-based repayment (IBR), and the credit report shows a monthly payment of $140. Under the new rule, the lender must use 1% of the balance ($80k), which is $800 instead of the $140 shown on the credit report.

A deferred student loan doesn’t exempt any borrower either. If no payment is shown on the credit report, the 1% rule will apply. This will push the borrower’s debt-to-income (DTI) ratio higher than the regular payment, hence, making the loan out-of-reach for most borrowers with a student loan.

For all case numbers assigned on or after August 16, 2021, the new rule for outstanding student loans will be as follows:

use the payment amount reported on the credit report or the actual documented payment, or

use 0.5 percent of the outstanding balance if the monthly payment is showing zero (0) on the credit report.

Asset Reserve Requirement

FHA-insured loans require a savings requirement or what is referred to as “Reserves.” The borrower’s middle FICO score dictates the total monthly reserve requirement. A Reserve is the total amount of savings the borrower has in liquid assets after the down payment is used to purchase the home. One month reserve equals one full monthly mortgage payment. If the borrower’s proposed monthly mortgage payment, the principal, interest, taxes, and insurance (PITI) are $1,000, one month in reserve is $1,000, just the same. The general rule of 3 months in reserve is a good rule of thumb but not required in all cases. The three (3) months or more in reserve rule will only apply if the borrower purchases a 3 – 4 unit property or has a middle FICO score of less than 620.

Down Payment Requirement

All FHA loans require a down payment. An FHA loan’s minimum down payment requirement is 3.5 percent of the sales price. This applies to borrowers with a middle FICO score of 580 and above. Those with a credit score under 580 and under, all the way down to 500, may still qualify for an FHA loan but must come up with a minimum of 10 percent down.

Down payment can come from the borrower’s 401(k) account. If the home buyer borrows against their 401(k), it will not count as the borrower’s monthly payment obligations for underwriting purposes.

Gift Funds

A borrower can also use “gift funds” as a source of down payment. The borrower’s immediate family can gift the down payment; their employer, labor union, a charitable organization, or any close family friend with a clearly defined and documented interest in the borrower may also contribute to the borrower’s gift fund.

Bank Deposit

An FHA requirement regarding large non-payroll deposits is quite often overlooked. Every borrower is required to provide a credible explanation and documentation of the source of funds where the large non-payroll deposit came from. Typically, this is easily documented when money is moved or transferred from one account to another, e.g., Savings to Checking. However, there are circumstances wherein the borrower gets money from other people or another source. This is where the documentation is not evident.

Property Requirement

Appraisal Guideline

An appraisal is an expert assessment of an independent third party (the Appraiser) to determine the property’s value. As a general rule, the appraised value of a property must justify the house’s sales price. During the process, the Appraiser will look at comparable sales (comps) in the area within the last six months. He will visit, measure, and evaluate the “subject property” inside and out. The Appraiser will then provide an expert opinion regarding the property’s value and include any repairs required to meet the said value.

How does an appraisal of an FHA loan differ from a conventional loan?

A conventional loan appraisal is mainly concerned with the property’s current market value. The Appraiser is only worried about the property’s condition as it relates to the value relative to the sales price. That is primarily the objective of a conventional loan appraisal.

An FHA loan appraisal has another objective besides the value relative to the sales price. The Housing and Urban Development (HUD) requires the Appraiser to inspect certain elements to ensure the property meets HUD’s minimum standards for health and safety. The property must be safe, sound, and secure. Are more comprehensive checklist can be found in the FHA handbook. As a reminder, HUD doesn’t require a regular home inspection report. They highly recommend any home buyer get the property thoroughly inspected by a certified home inspector. However, it is ultimately up to the borrower to have an inspection done for their peace of mind. They need to make sure the property will not be a money pit in the future.

In today’s lending world, it is highly recommended that all borrowers be prepared for documentation. Have all sources of funds documented accordingly. Not only will this ensure that the loan file moves smoothly in processing, but this also eases the burden on behalf of the borrower if everything is documented upfront.

For additional information on savings or sourcing, please contact our FHA Home Loan Specialists at 800-854-4142.

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We Make The FHA Loan Process Quick & Easy

Lenders often times will steer their clients away from an FHA loan due to their inexperience with the program. FHA Loans are a great source of funding for our clients. We share our knowledge and experience with FHA loans, making it easier for borrowers.

FHA Approved Lender

The Federal Housing Administration requires lenders offering FHA loans to go through an extensive approval process. We are FHA-approved and designated as a “Full Eagle” FHA mortgage lender offering FHA-insured home loans in Texas.

Texas FHA is a dba of Capital Home Mortgage

901 Halsell St., Bridgeport, TX 76526
Phone: (800) 854-4142
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