Understanding the Different Types of Home Loans Available in Texas

Introduction

Owning a home is a major achievement in life and getting the right kind of home loan is very essential to enable one to achieve this dream. There are various types of home loans that are offered in Texas and each of them is designed to meet a certain financial requirement. This is especially important if you are a first time home buyer, a veteran or if you have bad credit, you need to understand your choices.

Conventional Loans

Fixed rate loans are the most popular type of home loans in Texas. These loans are not government insured and the credit score is higher than those for a conventional loan and the down payment ranges from 3-5%. Fixed rate loans are relatively cheaper than the other types of loans especially to people with a good credit standing. There are two types of conventional loans: conforming and non-conforming. Fannie Mae and Freddie Mac loans are known as conforming loans while loans that do not meet the above limits are called non-conforming loans or jumbo loans.

FHA Loans

FHA loans are those loans which are insured by the Federal Housing Administration and these loans are preferred by first time home buyers and people having low credit scores. These loans entail a small down payment and it may be as low as 3% for the loan. It provides financing of 5%—and has looser credit standards. Nevertheless, borrowers have to make mortgage insurance premium payments which are initial and on an annual basis which can be quite expensive.

VA Loans

VA loans are great for those who are a veteran, on active duty, or is a members of the National Guard or Reserves. These loans are guaranteed by the Department of Veterans Affairs and come with some advantages such as no down payment, no requirement for a PMI and reasonable interest rates. VA loans also have less strict credit score requirements and therefore make homeownership possible for veterans.

USDA Loans

USDA loans are the loans that are given out by the U.S. Department of Agriculture, and its purpose is to help borrowers with low to moderate incomes living in rural areas. These are non collateral loans that do not need any initial payment and have relatively low interest rates. Nevertheless, the programs are only available to borrowers who meet set income and property location criteria. USDA loans are great for people who would like to purchase a home in the rural regions of Texas.

Texas Veteran Land Board (VLB) Loans

Texas offers unique loan programs specifically for veterans through the Texas Veteran Land Board. These loans can be used to purchase land, homes, or make home improvements. VLB loans offer competitive interest rates and low down payments, making them an attractive option for Texas veterans.

Jumbo Loans

For those looking to purchase luxury properties or homes that exceed the conforming loan limits, jumbo loans are available. These loans are non-conforming and typically require a higher credit score, a larger down payment, and substantial financial documentation. Jumbo loans often have higher interest rates compared to conventional loans due to the increased risk to the lender.

Adjustable-Rate Mortgages (ARMs)

An ARM is a mortgage in which the interest rate is fixed for a limited period of time, which can be 5, 7 or 10 years, then it changes periodically. ARMs can be useful for the borrowers who are going to sell or refinance their house before the adjustment period comes into operation. However, the unpredictability of future interest rates can be dangerous for some borrowers.

Fixed-Rate Mortgages

Conventional home loan is one of the most common types of loans which provide the same monthly payments throughout the term of the loan. For any selected term whether 15 years or 30 years, the interest rate is fixed and thus the payment is very predictable. Such a loan is suitable for people who intend to live in the house for a long time and wish to be shielded from fluctuating interest rates.

Interest-Only Loans

Interest only mortgage loan lets the borrower pay only the interest during a certain period of time which is usually between 5 and 10 years. After this period, the loan reverts to a conventional fully amortizing mortgage and the borrowers begin to pay off both the principal and interest. Although this can reduce initial costs, it also implies that the nominal is constant during the interest-only period, which is rather dangerous if property prices are falling.

Home Equity Loans

Home equity loans enable borrowers to borrow money against the value that they have in their homes. This type of loan can be used for home improvements, debt consolidation or any other need as deemed appropriate by the borrower. Home equity loans for instance in Texas have certain laws that govern it such as a maximum loan to value of 80%. Home equity loans are usually of fixed interest rates and have a regular payment period.

Bottom Line

The process of selecting home loans may not be easy but armed with the right information, the buyers from Texas will be in a position to secure the right loan for them. Starting with the traditional mortgage loans, through the government-insured FHA loans, VA loans, USDA loans, knowing the characteristics, advantages and conditions of each type of home loan will enable borrowers to make a proper decision for their financial well-being.