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The deal is expected to be announced no later than Saturday.
Texans owner Bob McNair wanted a coach who had both NFL experience and head coaching experience.
O’Brien, a protégé of Patriots coach Bill Belichick, was a New England assistant from 2007 until 2012. He eventually became the offensive coordinator for a Patriots team that lost to the New York Giants in Super Bowl XLVI.
He left the Patriots two years ago to take over Penn State in the wake of the Jerry Sandusky sexual abuse scandal.
Despite a bowl ban and relaxed transfer rules that allowed players to leave Penn State without delay, the Nittany Lions went 15-9 under O’Brien, including 10-6 in the Big Ten. He was the conference coach of the year in 2012.
Before becoming Penn State’s coach, O’Brien, 44, was an offensive assistant with the New England Patriots from 2007 to 2011, and took over the role of offensive coordinator before moving on.
The Texans were the first team to create a coaching vacancy this season when they fired Gary Kubiak on Dec. 6, and they’re the first to make a new hire.
Despite Super Bowl aspirations and what Texans owner Bob McNair called the most talented roster he’d ever had, the Texans went 2-14 this season after winning back-to-back AFC South titles the previous two years.
Defensive coordinator Wade Phillips took over as interim coach once Kubiak was fired, and he was one of three candidates the Texans interviewed for the position, along with O’Brien and former Bears coach Lovie Smith, who did not coach during the 2013 season after being fired after the 2012 season.
O’Brien met with the Texans the week after Christmas at his home on Cape Cod in Massachusetts, sources said.
As a condition to returning to Penn State for 2012, O’Brien and the school agreed to an amended contract that lowered his buyout to join an NFL team from $19.33 million to $6.48 million. There had been conversations to further reduce the NFL buyout.
Incoming Penn State recruit Thomas Holley, the school’s second-highest ranked recruit in 2014, told ESPN.com that he had a conversation Saturday with O’Brien, who told the defensive lineman that he way staying with the Nittany Lions.
“He said it’s not true, he’s going to be at Penn State and he’s going to be there for me when I get there,” Holley told ESPN.com.
The Texans will pick first overall in the 2014 NFL draft and are expected to target a quarterback for the future.
Information from ESPN’s Adam Schefter and Chris Mortensen and ESPN.com’s Tania Ganguli and Tom VanHaaren contributed to this report.