When buying a home, there are several items to keep in mind. Austin Community College District (ACC) experts share tips on what you should know about buying a home in Texas and home loans.

Written by: Job Hammond, ACC Real Estate Professor
Articles published in MoneyGeek

Buying a House in Texas

What are the key factors to consider when buying a house in Texas?
Buying a house in Texas can be a dream for anyone seeking stability, community, and the potential for an appreciating investment. When considering the purchase of a home, it is essential to consider your credit score and down payment. Most lenders will require a 620 or higher credit score. For those with better credit, lower interest rate discounts are available that can reduce the lifetime cost of the loan by tens of thousands of dollars. Borrowers who responsibly use credit, spend within reason and make timely payments will be best positioned to obtain a home loan. While there are loan programs that allow for as little as 3% down or less on a mortgage, the money required will still be a significant chunk of change.

What common mistakes do home buyers make when trying to purchase a property in Texas, and how can they avoid these pitfalls?
Home buyers should know that saving for just the down payment will not be enough to obtain a loan. Lenders will require a downpayment and at least two months of reserve funds to demonstrate the ability to repay. Create a fund for the cost of property maintenance, taxes and insurance to avoid any costly surprises. Fortunately, most lenders initiate an escrow account where a small part of each monthly payment gets applied toward property tax and insurance payments. Homeownership can create many years of enjoyment and financial benefits for those who buy. Consider hiring an experienced local REALTOR to help guide you through the real estate process.

What Is a Conventional Home Loan?

Conventional loan market share (versus government-backed loans) has ranged from about 55% to approximately 80% in recent years. What do you believe drives changes in the popularity of these loans?
A home loan allows buyers to move into their home with a relatively low down payment. The most popular types of loans are conventional, also known as conforming loans, and follow the lending guidelines established by Fannie Mae and Freddie Mac. Conventional loans require good credit due to the tighter lending requirements. There has been a shift towards conventional loans because of their low fees, competitive interest rates and higher loan limits. The Federal Housing Finance Agency sets the maximum loan amount and adjusts it annually based on the house price index. In 2023, borrowers can finance up to $726,200 in most parts of the country and $1,089,300 in high-cost areas.

What do you believe is the most pervasive myth about conventional mortgage financing?
The biggest myth in conventional mortgage financing is that a 20% down payment is needed. Borrowers can put as little as 3% down on a home if they meet the guidelines. For down payments of less than 20%, the borrower must pay private mortgage insurance (PMI), which will add a monthly nominal fee. PMI insures the lender in the event of default. Fortunately, conventional loans allow PMI to be automatically removed once the loan balance reaches 78% of the home’s appraised value.

Home Equity Loans

What should homeowners understand before taking out a home equity loan?
Homeowners who have gained much equity in their homes over recent years can turn their house into a cash register. Homeowners can use the equity for home improvement, medical payments, college tuition or reducing high-interest debt. The homeowner may apply for a home equity loan, which creates a lien against their house to create a line of credit. While the line of credit may be used for anything, it is essential to use sound financial judgment when using credit lines. Paying down high-interest debt would be a good use compared to spending money on your dream vacation.

What are some common misconceptions about the use of home equity in loans?
Your bank may claim that your equity loan is tax-deductible. However, discussing your specific financial situation with a certified accountant is essential. You would need to use the equity loan to improve your qualified primary residence or second home to use the tax deduction. There are limits on total mortgage debt and loan amounts, and the loan amounts cannot exceed the house’s value. These deductions only apply if the taxpayer itemizes deductions and does not take the standard deduction.