Like the rest of the country, the housing market in Texas has experienced a roller-coaster ride in 2020 because of the coronavirus pandemic. But with the population in Texas continuing to climb (the state added the highest number of people over the past 10 years), all signs point to purchasing a new home in the Lone Star State being a good investment.

Homeownership in Texas is rising, with about 70% of the state’s residents owning the home they live in. Relatively low housing costs in some parts of the state and an enormous variation in types of communities available should let Texas remain an attractive option for those looking to relocate.

Whatever their situation, purchasing a home anywhere, including in Texas, is a complicated process filled with often-confusing jargon and terms — and enough numbers to make your head spin. But we have the information Texas homebuyers need to make informed decisions about their next — or their first-ever — home purchase.

Texas First Time Home Buyer Options

Almost everything changed in 2020 thanks to the pandemic, but there are some things that never change: Understanding the terminology related to mortgages is pretty much a full-time job. While there’s not enough space on the internet to explain everything, there are a few terms that every potential homebuyer should know about home loans, commonly called mortgages.

The select few who can pay cash for their home can jump ahead a section or two, but for most people, buying a house means getting a mortgage. These loans fall into two broad camps — conventional and government-backed.

Conventional

  • Private loan not backed or guaranteed by a federal agency
  • Typically offers a lower interest rate
  • Generally requires a down payment between 5% and 20%
  • Requires solid credit score, though the specific requirements vary by lender; buyers should plan for a minimum score of 640 for a conventional lender, and those with excellent scores may be able to get better interest rates

Government

  • Issued by a private lender but insured or guaranteed by a government agency; the most common mortgage backers are the Federal Housing Administration (FHA), U.S. Department of Veterans Affairs (VA) and U.S. Department of Agriculture (USDA). Eligibility rules vary by agency, as do income and purchase price limits
  • Requires low down payment, as little as 3.5% depending on credit score
  • Usually comes with higher interest rate than conventional mortgage
  • Borrowers with lower credit scores are eligible, though those with scores below 580 will usually be required to make larger down payment

Repayment options

The default way to purchase a home is to get a 30-year mortgage at one single, fixed interest rate. But that’s definitely not the only way, and there may be some reasons why alternative mortgage types are right for you.

ARM: A mortgage with an adjustable rate in which the percentage of interest charged changes over time. The most common type of these mortgages calls for the interest rate to change after a set number of years, often five or 10 years, which makes ARM mortgages appealing for those who intend to sell their homes before the rate adjusts. These can come in varying total terms, but 10-, 15- and 30-year ARM loans are the most common.

5/1 ARM: In this type of 30-year mortgage, a buyer pays a fixed interest rate for the initial five years. After that period, the interest rate is subject to annual changes based on an index to which the rate is tied. That means the homeowner’s payment will probably go up each year based on the interest rate, though it also could go down depending on broader economic conditions.

15-year: This fixed-rate mortgage is identical to a 30-year mortgage except that it takes half the time to pay off. But that comes with a trade-off, as the payment is about twice what it would be with a longer total loan term. For many buyers, the long-term interest savings is well worth it, but this depends on the total amount being borrowed.

Other terms to know

Here’s a look at a few other common home-buying terms Texas consumers should know before diving in.

Mortgage insurance: While many lenders don’t require a down payment of 20%, buyers who don’t make a down payment or make one that’s less than 20% will typically be required to pay private mortgage insurance until their loan-to-home value ratio gets to the same level as if they’d made a 20% down payment.

Equity: This term refers to the cash value you could realize if you were to sell your home. It’s based both on what you owe and what your home is worth. That means buyers have two ways of increasing their equity — paying down their mortgage and increasing the value of their property. It’s almost always better in the long run to make as large a down payment as possible so that you can start off your home purchase with at least some equity.

Closing costs: These are fees paid by the buyer and seller at the close of a real estate transaction. They are one-time costs, and they vary by location. They’re based on the value of the property being purchased, and in Texas, it’s typical for a buyer to pay between 2% and 5% of the purchase price in closing costs. That includes fees paid to the lender, real estate agent, title company, inspector, and others.

Housing Market in Texas

Texas has grown in population more quickly than any other state over the past decade, adding nearly 4 million residents since 2010. That equates to a growth rate of nearly 15%, which is the third-fastest in the country, according to data from the U.S. Census Bureau.

Top 10 states by numeric growth, 2010-2020

Texas3,738,767
Florida2,634,411
California2,162,860
North Carolina926,526
Georgia904,836
Washington870,397
Arizona864,980
Colorado709,665
South Carolina512,402
Virginia510,902

All that population growth has led to a housing boom in Texas, with the median home value rising by nearly one-quarter over just the past five years, according to the most recent data from Zillow.

Median Texas home value by year*

2016$182,652
2017$194,316
2018$205,828
2019$214,255
2020$225,016

* Monthly median recorded in October each year

In addition to rising home values, most housing markets in major metro areas have heated up considerably in Texas over just the past couple of years. For example, two years ago, the median number of days a house would remain on the market in the Austin area before a pending sale was reported was 31; today, that’s more like a week. A major exception to that is in El Paso, where the time on market has risen slightly.

Percentage change in median days to pending sale by metro area, 2018-2020

Austin-77.4%
Houston-56.3%
McAllen-54.7%
San Antonio-40.9%
Dallas-Fort Worth-35.3%
El Paso8.7%

The rising home values in metro areas across the state and declining length of time homes sit on the market before they are sold is being driven by rapidly increasing home values in cities large and small across the state. However, the Dallas-Fort Worth metro area is the biggest beneficiary of this change, as 19 of the 25 Texas communities with the largest increase in median home value are in the DFW area.

Top 25 Texas cities by percentage change in median home value, 2016-2020

Cockrell Hill81.6%
Hutchins78.7%
Forreston76.5%
Tom Bean74.0%
Westworth Village72.6%
Wilmer71.4%
Ferris65.8%
Luella64.9%
Commerce64.2%
Cottonwood64.0%
Alma63.7%
Bells62.9%
Everman62.5%
Balch Springs61.9%
River Oaks61.7%
Sansom Park61.2%
Campbell61.1%
Randolph Air Force Base60.2%
Milford59.9%
Neylandville59.5%
Italy58.9%
Batesville58.6%
Woodloch56.6%
Keene55.9%
White Settlement55.8%

Resources for Texas Homebuyers

Several programs are available for residents of Texas and those considering moving to the state, including grants and low-cost loans that can help ease the burden of a new home purchase.

Down payment assistance: Those considering purchasing their first home in one of the many large to medium-sized cities in Texas may be able to benefit from grants for first-time buyers. Be sure to check out what’s available in your city. The city of Abilene provides grants up to $5,000 in down payment assistance depending on income and family size, while the city of Austin offers up to $40,000 in down payment and closing cost assistance.

Texas State Affordable Housing Corp.: This state agency provides homebuyer assistance like down payment grants, mortgages, and second liens to eligible homeowners and buyers across the state. Non-first-time buyers are eligible for most of the programs.

Federal Housing Administration (FHA): FHA-backed loans are popular, particularly for first-time homebuyers who may not have the savings to make a huge down payment. These loans also are one of the best ways for moderate- to low-income Americans to secure the financing to purchase a home. These loans are offered through private lenders but backed by the federal agency, which sets a limit on the amount that can be borrowed to purchase a property. In most of Texas, that limit is $331,760 for a single-family home, but it rises to $404,800 in the Austin and Dallas-Fort Worth metro areas. Be sure to consult the limit in the county you’re considering before deciding to pursue FHA financing.

U.S. Department of Agriculture (USDA): The USDA Rural Development Single Family Housing Direct Loan Program provides loans for homes in rural areas and other small communities with eligibility limits that depend on household income and size. Here’s a look at the limits to be considered a low-income, four-person family in metro areas in Texas for the purpose of direct USDA loans:

  • Abilene: $51,850
  • Amarillo: $57,300
  • Austin-Round Rock: $78,100
  • Beaumont-Port Arthur: $54,000
  • Brownsville-Harlingen: $47,100
  • College Station-Bryan: $54,800
  • Corpus Christi: $53,300
  • Dallas-Fort Worth-Arlington: $68,950
  • El Paso: $47,100
  • Houston-The Woodlands-Sugar Land: $65,450
  • Killeen-Temple: $51,100
  • Laredo: $47,100
  • Longview: $50,650
  • Lubbock: $53,700
  • McAllen-Edinburg-Mission: $47,100
  • Midland: $59,350
  • Odessa: $59,100
  • San Angelo: $56,000
  • San Antonio-New Braunfels: $57,600
  • Sherman-Denison: $58,250
  • Texarkana: $50,650
  • Tyler: $56,300
  • Victoria: $55,450
  • Waco: $52,550
  • Wichita Falls: $51,600

VA: Military veterans may be eligible for loans through Veterans Affairs, though the department has set maximum amounts that it will guarantee. In most states, these limits vary by county based on the cost of living, and in all states, they vary by the size of the property in question. For single-family homes in every county in Texas, the limit is $548,250.

Conclusion

Buying a new home is a huge financial and personal commitment, but doing your due diligence, you can make sure that your next Texas home purchase is not only a good investment but a good start to the next chapter of your life.

References