Sketching out the hand lettering
I started with a pencil and paper to sketch out the lettering. I did more iterations than shown below, but you could go on an on. In each variation there were elements I was happy with.

Turning the hand lettering in to vector artwork
I used these pencil sketches as a base to recreate it in Illustrator. I could have inked over the sketches, scanned them in and traced them to create vector shapes but as I need to use elements from each, I thought it was best to start from scratch using the pen tool and a graphics tablet.
After I had the paths in place, I tidied up the points, smoothed some curves and made the heights and spacing more uniform. I then experimented by applying various artistic brush styles to the paths. It turned out simplest was best and so I settled for a 5pt oval brush.
Applying a photographic texture to the vector shapes
After making a compound path from the individual paths, I moved them over to Photoshop as a shape layer ready to apply some texture. I chose Photoshop for this as the layer masks allow for a non-destructive way of applying textures.

Separately, I opened a photo to use as the texture. I used the threshold adjustments to set a level that would give a little texture. Initially I set the level too high and, once the texture was applied, the type was not legible enough (remember, that the black parts of the texture will be the parts of the type that will appear ‘eroded’ when applied).

Once I had set the threshold at a suitable level, I selected all, copied and pasted the adjusted photo in to the document with the Zero Tolerance shape layer. The black of the photo was selected with the magic wand tool and then copied. Pressing CMD + OPTION + SHIFT creates a new layer using the clipboard contents as a mask.

With the type shape layer selected, go to Layer -> Layer Mask -> Reveal All and then drag the mask from the texture layer to the empty mask of the type layer. You can then reposition and scale the texture until it looks right (so that no important parts of the type are hidden with the texture)

This design is available on apparel and as prints at society6

