FHA Adjustable-Rate Mortgages in Texas: A Complete Guide

Key Takeaways

• An FHA adjustable-rate mortgage (FHA ARM) starts with a fixed interest rate for a few years, then shifts to a variable rate.
  
  
• Rates can rise or fall after the fixed period, depending on market conditions.
  
  
• FHA ARMs are useful for buyers with lower credit scores, those planning to sell soon, or borrowers expecting higher future income.

What is an FHA Adjustable-Rate Mortgage?

An FHA adjustable-rate mortgage is a home loan backed by the Federal Housing Administration. It begins with a fixed interest rate for a set time, then changes at regular intervals for the rest of the loan term.

FHA loans are designed for borrowers who may not qualify for conventional financing. They require a low down payment—just 3.5% with a credit score of 580 or higher—and allow flexible credit standards. However, borrowers must pay mortgage insurance premiums (MIP), and loan amounts are capped based on federal limits.

While FHA rates are often lower than conventional loans, the added costs of MIP can sometimes make the annual percentage rate (APR) higher.

How FHA ARMs Work

Like other adjustable-rate mortgages, FHA ARMs have two phases:

1. Fixed period – Your interest rate stays the same for 1, 3, 5, 7, or 10 years.
   
   
2. Adjustment period – After the fixed term, your rate adjusts based on a market index (such as SOFR or CMT) plus a lender margin.
   

Caps are in place to protect borrowers. These limits restrict how much the interest rate can increase annually and over the lifetime of the loan.

FHA ARM Rates in Texas

Introductory rates for FHA ARMs are typically lower than 30-year fixed mortgages. For example, a 5/1 ARM often comes with a more attractive starting rate than a traditional fixed-rate loan. However, borrowers should compare the initial rate, adjustment terms, and lender margin carefully before committing.

FHA ARM Requirements

To qualify for an FHA ARM in Texas, you’ll need to meet these standard guidelines:

• Property: Must be your primary residence
  
  
• Loan limits (2025): $524,225 for most areas; higher in select Texas counties
  
  
• Credit score: Minimum 580 (or 500 with 10% down)
  
  
• Down payment: 3.5% at 580+ credit score, 10% for 500–579
  
  
• Debt-to-income ratio: 43% (can go up to 50% with strong compensating factors)
  
  
• Employment: Proof of stable income for the past two years
  
  
• MIP: 1.75% upfront plus annual premiums
  

FHA recently expanded underwriting flexibility, allowing consistent rental history to count toward creditworthiness.

Types of FHA ARMs

Borrowers can choose from different structures depending on their needs:

• 1-Year ARM – Fixed for 1 year, adjusts annually with 1% annual cap and 5% lifetime cap
  
  
• 3-Year ARM – Fixed for 3 years, same caps as the 1-year
  
  
• 5-Year ARM – Fixed for 5 years, then adjusts with 1–2% annual cap and 5–6% lifetime cap
  
  
• 7-Year ARM – Fixed for 7 years, then adjusts by up to 2% per year and 6% lifetime
  
  
• 10-Year ARM – Fixed for 10 years, then follows the same cap structure as the 7-year

Hybrid ARMs Explained

Hybrid FHA ARMs combine a fixed-rate period with an adjustable period. For example, a 5/1 ARM is fixed for five years, then adjusts every year after that. This structure offers lower upfront payments with flexibility for short-term homeowners.

Pros and Cons of FHA ARMs

Pros

• Lower starting interest rates
  
  
• Easier qualification for borrowers with lower credit
  
  
• Smaller down payment requirements
  
  
• Can make buying a home sooner more affordable
  

Cons

• Rates can rise after the fixed term
  
  
• MIP is required for most of the loan duration
  
  
• Loan limits restrict maximum borrowing amounts
  
  
• Monthly payments may become less predictable over time

Alternatives to FHA ARMs

If an FHA ARM isn’t the right fit, Texas homebuyers may consider:

• Fannie Mae HomeReady – Requires 3% down and moderate income limits
  
  
• Standard 97 Loan – For first-time buyers with 3% down
  
  
• Freddie Mac HomeOne – No income caps, designed for first-time buyers
  
  
• Freddie Mac Home Possible – For low- to moderate-income buyers, with flexible terms
  

These loans are also meant for primary residences, similar to FHA mortgages.

Refinancing Options

Many borrowers refinance before the first adjustment period begins. Refinancing into a fixed-rate loan can provide long-term stability, while refinancing into a conventional loan can eliminate mortgage insurance if you’ve built 20% equity.

Refinancing is most worthwhile when rates are lower than your current loan and you plan to stay in the home long enough to offset closing costs.

Should You Get an FHA ARM in Texas?

An FHA ARM could be a good choice if:

• You need a lower initial rate to qualify for a home today.
  
  
• You plan to sell or move within the fixed-rate period.
  
  
• You expect future income growth that will make higher payments manageable.
  

If you’re seeking affordability upfront but want to stay flexible, FHA ARMs may be a smart option for Texas homebuyers.

Dylken Home Loans is here to help Texas borrowers explore FHA ARMs and other mortgage solutions tailored to their goals.

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