The Lone Star State has a lot to offer for first-time homebuyers and luxury shoppers alike. With attractive prices across the board,
Texasoffers options for everyone in rural, urban, and oceanfront areas.
But if you’ve never bought a home before or you’re not familiar with the Texan market, the home buying process can be a little unnerving. The state’s sheer size and number of options make it hard to know where to begin.
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Figure out your finances
Everyone wants to jump on a home search app, but before you can even set those price filters, you need to know how much you can afford. To figure that out, take a close look at your financial situation.
Pull out those financial records. You’ll need to understand your credit score, your debt-to-income ratio, and home purchase costs before you start looking for your Texas dream home.
Check your credit score
Start by checking your credit score. This single number is the starting point for your home purchase process. The higher it is, the better mortgage terms you can get. If it’s too low, you may not qualify at all.
How do you check your credit score? Many credit card companies track your score for free if you’re a cardholder. You can also look into one of the three major credit bureaus: Experian, Transunion, or Equifax.
The minimum credit score to purchase a home with a conventional loan in Texas is 620. But don’t worry if you’re not quite there; you have a few options.
- Build your credit. This option is time-consuming, but if you’re also saving up for a down payment, it could work for you. To build credit, pay down credit card and loan balances, make payments on time, and don’t take on any more debt.
- The Federal Housing Administration (FHA) and Veterans Administration (VA) offer mortgages for people with credit scores as low as 523 (FHA) and 500 (VA). Both have other requirements to qualify, so check them out.
Calculate your debt-to-income (DTI) ratio
Next, you need to calculate your debt-to-income ratio, or DTI, which is the comparison between the money you have coming in and the money you have going out. To find this number, add up your monthly payments and divide that number by your pre-tax monthly income. Payments you have to include in the debt portion include:
- Rent or house payments
- Car payments
- Credit card payments
- Student loan payments
- Alimony or child support
If your expenses eat up more than 50% of your income, you’ll have a hard time getting a conventional loan in Texas. You should shoot for a DTI below 36%—otherwise, you’ll have to go with a different program.
Determine your down payment
The down payment is the amount of money you pay in cash when you buy a home. Conventional mortgages require a down payment of 20%. With typical home values in Texas around $276,000, you’ll need to put down about $55,200 in cash—plus closing costs!
If that number seems high, you’re not alone. The main barrier to homeownership right now is first-time buyers being unable to save for a down payment while paying rent. But don’t worry. If 20% is too high, there are other options:
- FHA loan: A mortgage insured by the Federal Housing Administration for low- and moderate-income homebuyers with down payments as low as 3.5%
- VA home loan: A mortgage insured by the Veterans Administration for servicemembers, veterans, and eligible surviving spouses that provides0% down loans with low interest rates and low closing costs
- First-time homebuyers program: TheMy First Texas Homeprogram applies to anyone who hasn’t owned a home in the last three years. It provides up to 5% of the loan amount to use for the down payment and offers a second 3-year forgivable loan to use for the down payment. It also offers a 30-year mortgage with low interest rates
Prepare for closing costs and other fees
You’ve probably heard the term “closing costs,” but you may not know exactly what it means. Closing costs are the costs associated with buying or selling a home, and they include the following:
- Home appraisal fee (required by most lenders)
- Credit reports
- Title searches and insurance
- Home inspection fee
- Mortgage origination fee
- Mortgage insurance
- Property taxes
- Homeowners insurance
In Texas, closing costs for the buyer usually end up being less than the national average. In Texas, buyers usually pay around 1.4% of the home’s total value, while typical closing costs in the US are closer to 3-5%.
Looking back at a typical home value of around $276,000, a buyer in Texas will normally pay around $3,900 in closing costs on top of their down payment.
Key Takeaway Closing costs for a buyer in Texas are around 1.4% of a home’s total value.
Look for homeowners insurance
Homeowners insurancefactors into closing costs, and just like car insurance, you’ll need to keep paying for it to protect your investment. Texas is the 5th most expensive state in the country for homeowners insurance due to the high number of natural disasters that hit the state each year.
On average, homeowners insurance in Texas costs $3,429 annually. You may also need to purchase a separate flood insurance policy for around $649 per year.
The home buying process is already long, but don’t rush this part. Compare quotes to find the best coverage for the lowest rate.
Key Takeaways Before house hunting, evaluate your credit score and DTI, figure out what down payment you can afford, sort out closing costs, and shop for homeowners insurance.
Get preapproved for a mortgage
We’re almost to the fun part, but before you start searching for your dream home, you should get prequalified for a mortgage. A preapproval shows sellers you’re capable and serious about buying.
Here’s how to get prequalified:
- Shop around for low interest rates. Try national banks, local banks, and credit unions.
- Compile your banking info, employment history, assets, debts, and tax information
- Fill out a mortgage application
The preapproval process is pretty clear-cut, and your lender can help you. However, it’s important to assess your financial situation and make sure you’re ready to buy before you start.
If your finances won’t allow you to get approved, the hard credit check performed by the lender will ding your credit score and make it harder to get approved later.
How to pick the right mortgage in Texas
To choose a mortgage, consider the mortgage term, mortgage type, and interest rate.
The two most common mortgage terms are 30 years and 15 years. The 30-year mortgage term has lower monthly payments, but you’ll have a higher interest rate (around 3.5%). The 15-year mortgage can have an interest rate lower than 2.5%, but you’ll make higher monthly payments because of the shorter term.
You’ll also have to choose between a fixed-rate and adjustable-rate mortgage. A fixed-rate mortgage has an interest rate that won’t change, meaning that the monthly payments will remain the same over the life of the loan. It’s a good option for buyers seeking payment stability.
An adjustable-rate mortgage has a variable interest rate that fluctuates with the market. These loans can start with lower interest rates, but you should read the fine print to find out how much your rate and payments can increase.
Key Takeaway Each mortgage option has its own pros and cons. Talk to your lender to decide what’s right for you.
Look for a house
Finally! After you’re preapproved, it’s time to look for a house!
Pick your city or neighborhood
Start by deciding where you want to live. City or country? Coast or interior? Are you looking for a small town like Fredericksburg or a big, growing city like Austin?
If your location is already decided by another factor like family or a job, you can still decide what kind of neighborhood you want to live in. Most cities have a range of neighborhoods that vary in style, culture, and cost.
Other factors to consider are political leanings, school districts, crime rates, and climate. Don’t forget to take the cost of
home and car insuranceinto consideration.
Texas car insurance laws
Buyer’s market vs. seller’s market
The strategy of your house hunt will depend on if you’re in a buyer’s market or a seller’s market.
- In a buyer’s market, the supply of homes is greater than the demand, so you can take your time and negotiate a lower price
- In a seller’s market, there are more buyers than there are available houses, so houses will sell quickly—sometimes going to auction for over asking price
If you’re not sure if you’re in a buyer or seller’s market, do an online search. Check recent home sales in the neighborhood and compare the asking price to the selling price. If the final selling price is frequently higher than the original asking price, you’re in a seller’s market.
Another reliable indicator is the time on the market: houses sell quickly in a seller’s market, while in a buyer’s market, they can stick around.
In early 2022, Texas is in a seller’s market—but some reports suggest that this is about to change. If you opt to buy now, you’ll need to put in an offer right away and avoid bidding too low so you don’t lose out on the sale. If you can afford to wait, it may be worth it to see if the market shifts to buyer-favorable conditions.
Key Takeaway Once you choose the location of your future home, find out whether it’s in a buyer or seller’s market.
Find a real estate agent
While it’s not a requirement in Texas, hiring a real estate agent can take a lot of stress out of the house-hunting process. Real estate agents know the ins and outs of the markets they serve, and they’ll be able to provide you with home listings that you wouldn’t otherwise find.
Make an offer
You’ve sorted your finances, hired a real estate agent, and found your dream home. It’s time to make an offer on the house.
Making an offer is exciting and anxiety-inducing, but your agent can help you. Together, you’ll calculate the best offer based on the market, fill out the paperwork, and submit it to the seller.
Then you just have to wait for the seller’s response—which is hopefully a yes!
How to save on homeowners insurance
House hunting is exciting; insurance isn’t. But the last thing you want is to not be able to repair your new home if something happens to it—especially in a disaster-prone state like Texas.
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How much money do I need to buy a house in Texas?
The amount you need will depend on where and what kind of house you’re buying, the type of your mortgage, and the size of your down payment. It’s wise to start with your down payment and closing costs in hand.
With Texas homes averaging $276,000, that number would be around $59,100 for a conventional loan or $13,650 for an FHA loan.
What credit score is needed to buy a house in Texas?
For a conventional loan, you’ll need a 620 credit score to buy a house in Texas. If your score is below 620 but above 500, you may qualify for an FHA or VA loan.
What is the best place to buy a house in Texas?
Since Texas is so big with so much variety, it really depends on what you’re looking for.
If you want luxury, look in Southlake. If you’re a first-time homebuyer looking for affordable property, check out Witchita Falls. You can also find deals in big metropolitan areas like Austin and Houston. They lean more expensive, but the job markets in these cities are also growing rapidly.