Back HomeWhat are your loan options when buying a house?
The process of buying a house in Texas can be rewarding for those who come prepared. However, securing financing is often a major stumbling block for many buyers. Here is some general information on common loan options to help you get started.
CONVENTIONAL MORTGAGES
A conventional loan is offered by private lenders like banks and mortgage companies without any government backing. This type of loan conforms with guidelines set by Freddie Mac (Federal Home Loan Mortgage Corporation) and Fannie Mae (Federal National Mortgage Association).
While conventional loans require a higher down payment than government-backed loans, there are conventional loan programs with down payment options as low as 3% to 5% of the purchase price. However, a larger down payment of about 20% is recommended to avoid paying for private mortgage insurance (PMI) which acts as a means to protect the lender in case you default on your mortgage.
FIXED-RATE MORTGAGES (FRMs)
FRMs are ideal for borrowers who prefer predictable monthly mortgage payments and plan to stay in their home for a longer period. This loan type offers 15- and 30-year fixed-rate terms, which means that your interest rate won’t change throughout the life span of the loan. Further, the amount you pay before taxes and home insurance will stay the same.
ADJUSTABLE RATE MORTGAGES (ARMs)
ARM loans are recommended for borrowers who plan to move out of their home within a few years or those who want to save some money by paying off their loan early. This loan type begins with a fixed interest period lasting five to ten years, depending on the lender and the terms of the loan. During this time, you’ll have a fixed rate that is lower than current market rates. After the fixed-rate period ends, your interest rate will rise or fall along with fluctuations in market interest rates.
With ARMs, there’s always the risk that interest rates will increase over time. Fortunately, this loan has rate caps for each year and for the entire life cycle of the loan to limit how much your interest can rise or fall with time. These rate caps will help shield you in case interest rates continually rise year after year.
Buyers who save the most money with an ARM usually plan to move or refinance toward the end of the fixed-rate period. This loan type is also a sensible choice if market interest rates are high when you buy a home.
GOVERNMENT LOANS
Government loans are backed or insured by various government agencies. These loans were intended to make homeownership more accessible for certain buyers, such as first-time homeowners, veterans, and borrowers who have lower credit scores or are unable to make larger down payments. Government backing helps lower the risk for lenders so that borrowers could qualify for a mortgage.
Some of the most common government loans include:
- FHA loan – This loan type is available through private lenders and is guaranteed by the Federal Housing Administration. You may be eligible for an FHA loan even with a lower credit score and a 3.5% down payment. However, you may need to pay upfront for a monthly mortgage insurance premium (MIP).
- USDA loan – This mortgage product is backed by the United States Department of Agriculture to help encourage growth and development in certain rural areas. It requires zero down payment, making it easier for low-to-moderate-income buyers to purchase homes in eligible rural communities.
- VA loan – This loan is meant to help veterans, active-duty service members, or the surviving spouses of service members who died in the line of duty. It is insured by the Department of Veterans Affairs and typically requires zero down payment. In addition, VA loans often have competitive interest rates and don’t require borrowers to pay for PMI.
JUMBO LOANS
A jumbo loan exceeds the conforming loan limits set by Freddie Mac and Fannie Mae. This loan type is typically used to finance higher-priced properties like luxury properties and homes in expensive markets where prices and property values are much higher than the national average.
Since it involves a larger amount and presents more risk, lenders usually have stricter underwriting requirements and higher interest rates for jumbo loans compared to conventional loans. A jumbo loan also requires a larger down payment ranging from 10% to 20% of the purchase price.
Find your dream home in Texas with Berkshire Hathaway HomeServices Caliber Realty. As an established real estate brokerage firm, they provide professional guidance and advice. Contact their team at 979.694.8844 or send a message to schedule a consultation.
