Weighing the Pros and Cons of Different Home Loans in Texas

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.

Texas home loan

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.

Pros

  • 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

Cons

  • 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.

Pros

  • 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

Cons

  • 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.

Pros

  • 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

Cons

  • 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.

Pros

  • A nominal down payment, usually lying in the range of 3-5 percent
  • PMI drops after some time
  • Lower monthly PMIs than FHA

Cons

  • 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

Wrapping Up

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.

Texas First Time Home Buyers: Key Financial Details to Keep in Mind

A Report from the National Association of Realtors states that in the year 2015, millennials in the 18-34 age group compose the largest group of home buyers in America (32 percent of homebuyers), and the number is slated to grow further with every passing year. If you fall in this category and wish to ditch that tiny rental apartment, buying your first home is one of the biggest financial decisions you will ever make. To help you make an informed buying decision, here are some key financial details to keep in mind.

Align your Finances

Before you take a plunge into a home buying process, make sure your funds are aligned, and all dues paid on time. A good credit score, bill payment history, and maximum debt-to-income ratio of 43 percent, are prerequisites for qualifying for home loans. The prerequisites, however, vary from lender to lender. Borrowers with low debt income are more likely to qualify for home loans. In addition, if you are planning to buy a home in the near future, now is the right time to enhance your savings to cover the down payment on your home and other costs involved. Although there are several loan programs that require low down payments, adequate savings can help buyers cover their moving expenses and closing costs.

Know How Much you can Afford

To calculate your expense limit, get pre-approval from the lender. Pre-approval is an evaluation of a potential borrower by a lender that involves a thorough look into borrower’s credit report and score. It determines whether the borrower qualifies for a loan and how much the lender would be willing to lend. In fact, it has become something of an obligation on the part of borrowers as some real estate agents ask for a pre-approval before showing you the property. Having said that, the borrower should also take a closer look at the stats and do their maths to know how much can they actually afford. In many cases, homebuyers pay their monthly payments leaving them with no funds to take care of other expenses.

Don’t Ignore the PMI

If homebuyers are unable to afford 20 percent of the home value as down payment, they are asked to pay for the primary mortgage insurance (PMI). A PMI is a risk management product that protects lenders against defaulting borrowers. Most conventional lenders charge a PMI fee if borrowers pay between 3 percent to 19 percent as they are considered high-risk borrowers. The PMI usually increases the mortgage payment by 0.25 percent to 2 percent per annum. Also, as PMI is directly proportional to the loan amount, the fee increases with the increased loan amount.

Factor in Closing Costs

According to ClosingCorp, two-third of millennials planning to buy a home are not aware of closing costs, and it comes as a shock at the time of closure. Often known as settlement costs, closing costs are the compilation of all the fees and price paid to complete the real-estate transaction, such as title insurance, title searches, survey, taxes, and credit report charges, among others. Closing costs add up to 2 to 5 percent of the purchase amount. It is important to work out all the details related to closing cost before you make an offer at any home.

The Bottom Line

First time home buyers can get overwhelmed by the tedious loan borrowing process. Educating yourself on the process and fees involved helps you overcome several hurdles that may come your way during the buying process. Lastly, if you are planning to buy a property in Texas, consult a Texas home loan and mortgage company before choosing any loan. Carefully evaluate all the fees involved in the process before making a final decision

Looking for Your First Home? A Few Tips

Home mortgage loanBuying your first home is one of the most important decisions you will ever make. From looking for a property, financing your purchase, and finally moving in, buying your first home is a process, requiring research and knowledge. Taking out a home mortgage is an integral step for prospective buyers trying to fulfilling their dreams of becoming homeowners.

The home mortgage process is challenging for anyone, but especially first time homebuyers. If you are entering the market for the first time, you may accidentally delay the process due to futile efforts to find the right mortgage. Having the appropriate proof of income, credit score, and other paperwork can intimidate prospective home buyers.

The home mortgage market rules and trends have changed a lot over the past decade, and one should rely only on authentic information rather than just talking to the neighbor next door! Experts say that by preparing well in advance, those entering the market for the first time can also make a smooth move towards buying their home.

Aspiring mortgagees need to start preparing at least six months to a year before actually looking for a property. Preparations could include managing their existing debts in a manner that reflect positively on their credit reports, saving a significant amount so that they can afford a down payment.

Additionally, borrowers should meet different mortgage companies and get pre-approval for a particular loan amount. This also gives a fair idea of how much the future monthly payments would be. If you are a first time home buyers in Texas, you can also ask your friends or family to recommend a lender, or just search online to find a leading mortgage firm that has credibility in the market.

After choosing a lender, the next step would be to keep the related documents in order that can be submitted to the lender. Last but not the least; borrowers need to prepare for the home mortgage closing costs, well in advance.

When borrowers are in the market to buy a property, they need to make a strategic and sensible decision. Hence, they should work with a mortgage company with the expertise to guide new home buyers. Simply go online to look for a reliable mortgage company in your area. First time home buyers in Texas can, for example, find the leading mortgage lenders in their area by searching online and connecting with them through their website.