The Rockets made it official Wednesday that McHale will take over for Rick Adelman, who left the team days after his fourth season in Houston.
McHale spent 15 years with the Timberwolves in his native Minnesota. The Hall of Famer was let go in 2009 and has recently served as a TV analyst. Reports last Friday said he was taking the job.
He will be introduced at a news conference in Houston on Friday.
The 53-year-old McHale becomes Houston's third coach since 2003, when Rudy Tomjanovich stepped down for health reasons. Jeff Van Gundy coached the team from 2003-07, taking the Rockets to three playoff appearances.
"As we explored the opportunity to come to Houston, it felt like the right situation for me," McHale said in a statement. "I enjoy the competitive nature of our game and I am looking forward to getting to work with the very talented roster of players that are already in place here in Houston."
He will return to coaching for the first time since posting a 20-43 record with the Timberwolves in the 2008-09 season, when he took over after Randy Wittman was fired. McHale also led Minnesota for the last 31 games of the 2004-2005 season after he fired Flip Saunders, but he has never coached a full NBA season.
Rockets owner Leslie Alexander believes McHale's impressive basketball pedigree will lead to success in Houston despite his limited coaching experience.
"Kevin McHale is a proven NBA champion (with the Boston Celtics) who has the leadership skills and basketball knowledge necessary to guide our team into the future," Alexander said. "Kevin's hard-nosed work ethic and tenacity on the court led him to a Hall of Fame career and a legacy as one of the NBA's greatest low-post players of all time. I'm looking forward to seeing Kevin share his unique basketball knowledge and experience."
Houston has failed to reach the playoffs the last two years as it dealt with injuries that have limited All-Star center Yao Ming to just five games since the 2008-09 season. In Yao's last healthy season, Houston reached the Western Conference semifinals, breaking a streak of seven consecutive first-round exits for the franchise.
The Rockets went 43-39 this season as one of the league's highest-scoring teams, averaging 105.9 points per game.
Yao's contract expires this summer, but he has said he hopes to continue playing for the Rockets when he recovers from the stress fracture to his left ankle.
McHale first joined the Timberwolves as a TV analyst and special assistant before he was promoted to assistant general manager in August 1994. He was promoted to vice president of basketball operations in 1995 and drafted Kevin Garnett with the fifth overall pick that year.
The Wolves soon began a run of seven straight playoff appearances from 1997-2004 and reached the Western Conference finals in 2004.
The highlight of McHale's time as an executive in Minnesota was drafting Garnett. Subsequent moves and draft picks didn't turn out as well and he became increasingly unpopular with fans.
McHale was the third overall pick in the 1980 draft, won three championships with the Celtics and was chosen in 1996 as one of the 50 greatest NBA players.
He was a seven-time All-Star in his 13 seasons with the Celtics. He won the NBA's Sixth Man award twice and averaged 17.9 points and 7.3 rebounds for his career. He was even better in the playoffs where he averaged 18.8 points and 7.4 rebounds in 169 career games.
McHale was inducted into the Hall of Fame in 1999.