Many first time homebuyers in Texas and other parts in the US rely on a home loan to secure their dream home. Though there is no dearth of home loan programs in Texas, choosing the one that best suits your requirement may not be easy, because as a first time buyer you may lack the knowledge and expertise to differentiate between different home loans. While some home loans may not require you to pay a down payment, others may offer lucrative interest rates. If you are confused about which home loan to pick, in this post we discuss the available loan options in Texas along with their pros and cons. Let’s take a look.
1. VA Loan
The VA loan program is a federally backed housing program, guaranteed by the Department of Veteran Affairs. The program aims at assisting veterans of the American Armed services or their spouses in cases wherein the veteran dies of a service related cause to buy a first home or refinance a property. Goes without saying, the program being guaranteed by a federal body offers many benefits; however, you must learn the pros and cons before filing for a VA loan.
- Zero down payment
- Zero Private Mortgage Insurance (PMI)
- Zero prepayment penalty
- No minimum credit score requirements
- Can be effectively used for purchasing a first home or refinancing
- A nominal allowable debt-to-income ratio
- Entertains bankruptcy and foreclosure cases
- Requires an upfront funding fee
- Only meant to purchase primary residences and not holiday homes
- Loan limits and overlays
2. USDA Loan
USDA loans are offered under the USDA Rural Development Guaranteed Housing Loan Program. The program assists eligible applicants, mainly people with low to moderate income in securing their dream home in the rural regions of Texas and elsewhere in the US.
- Upto cent percent financing
- No restrictions on lot size or seller contributions
- No prepayment penalty
- Provision of gift funds to cover closing costs
- Ideal for both purchase or refinance
- Income restrictions depending on the median salary of people living in that area
- Monthly Private Mortgage Insurance for Lifetime
- Buyer is expected to occupy the home as primary residence
- Only single families are eligible
- Up to 3 weeks more processing time than other home loans
- Strict guidelines on debt to income ratio and credit score
3. FHA Loan
Started during the great depression in the 1930s, the FHA loan program is one of the most affordable loan programs for low income groups to secure a home in Texas or elsewhere in the US. Under the FHA loan program, a loan always originates from a FHA approved lender to protect the interests of the homebuyer.
- A minimum down payment of 3.5 percent of the total value of home
- Seller can pay the entire amount of closing costs
- Competitive interest rates than conventional loans
- Offers flexibility when it comes to credit score and past financial record
- Larger allowable income to debt ratios
- Requires an upfront loan fee to be rolled with the loan amount
- Lifetime MIP
- Strict loan limits depending on the region
4. Conventional Loans
Conventional loans, as the name suggests, are offered by private lenders. A conventional loan can either be a fixed rate loan or a jumbo mortgage. For a fixed rate loan, the interest rates doesn’t fluctuate that much and therefore, it’s quite easy to predict the final amount that a person will pay at the end of the tenure. A jumbo loan, on the other hand, has a much higher rate of interest than fixed term mortgages. The reason, there are no minimum credit requirements to secure this type of loan, which is a risky proposition for many lenders. All in all, going for a conventional loan has its share of pros and cons.
- A nominal down payment, usually lying in the range of 3-5 percent
- PMI drops after some time
- Lower monthly PMIs than FHA
- Stringent credit score and debt to ratio requirements
- Interest rates are more than federally backed counterparts such as VA, FHA and USDA
- Seller can only pay a maximum of 6 percent in closing costs
Once you decide which loan type is best for you, the job is only half done. Securing any type of loan requires the applicant to meet guidelines specific to the loan program and complete necessary paperwork. Applying for a home loan, especially for the first time is a challenge for many. To get clarity on the process and increase your odds of your loan application going through, you must consult a Texas Home loan and Mortgage company. Mortgage companies have dedicated loan officers who can help you in each aspect of the home loan process from the start to finish.