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Located at the center of the Harris, Fort Bend, and Waller counties, the suburban community of Katy, Texas offers homeowners access to top-rated schools, beautiful green parks and neighborhoods, and numerous work opportunities in Downtown Houston and the Energy Corridor District.
And while mortgage rates are still inching upwards, the notable drop in November and December 2022 – plus its much slower growth rate in the weeks after – has opened a window of opportunity for many buyers who are still looking for the right home in this family-friendly city.
So, to help make your home-buying process easier, here’s our comprehensive guide to financing a home purchase in Katy, TX:
HOW MUCH HOME CAN YOU AFFORD?
Before you start looking for the right mortgage loan for your home purchase, you must first understand your current financial situation and resources.
How much savings do you have? How much debt are you still paying off? What will your monthly expenses be after housing costs? Answering these questions and evaluating your purchasing power can help you clarify your budget, assess the type of loan you need, and know the kind of home you can buy. This is also a good time to collect and organize the necessary financial information you need for your mortgage application, such as bank statements and income tax returns.
CALCULATE YOUR MONTHLY EXPENSES
Ideally, you should not spend more than 28% of your gross monthly income on housing costs, which includes:
- Your monthly mortgage payment
- Property taxes
- Homeowners insurance
- Private mortgage insurance
- Miscellaneous expenses such as repair, renovation, and maintenance costs.
If you have any long-term debts that you are still paying off, make sure that these payments – in addition to your projected housing costs – do not go beyond 38% of your household’s gross monthly income.
Homebuyers typically qualify for loans that are twice the amount of their gross annual income. This amount can go higher or lower from here, depending on other factors such as your capital and credit history.
START GATHERING THE NECESSARY DOCUMENTS AND RECORDS
It’s wise to get your financial records and legal documents together before you meet with potential lenders. While requirements can vary per lending institution, borrowers are often asked for the following:
- Social Security card and driver’s license (or any official photo ID)
- Your home address(es) for the past two years
- Employment information and your place of work for the past two years
- Most recent pay stub and W-2 form
- Income tax returns for the past three years
- Bank account information (including the current balance for each account)
- Investments (account numbers and/or addresses)
- Outstanding bank, credit card, or personal debts (including account number, balance, and monthly payment)
- Certifications of eligibility for public or government assistance (e.g. Veterans benefits)
- Other agreements or documents pertaining to alimony or child support payments (e.g. divorce decree).
ESTABLISH A GOOD CREDIT HISTORY
Your credit report plays a critical role in your mortgage application. It is what the lender refers to when assessing your character, specifically in terms of your fiscal honesty and responsibility. It also serves as proof of your capability in paying off your mortgage, based on your assets and resources, current employment and income, as well as other ongoing debt payments.
Problems arise when you don’t have a substantial credit history or when you currently have too much outstanding debt. Here is how you can address these issues:
SOLUTION #1: Put together a “non-traditional” credit history
This applies to aspiring homebuyers who can’t obtain a substantial credit report, which typically happens when they haven’t had any credit cards or financial loans. You can negotiate with your lender by compiling your paid bill statements, checks, and other monthly financial obligations, which can show your character and capability. Take note that it’s important that these documents are mostly free of late charges.
SOLUTION #2: Manage your debts
There are several “red flags” in a person’s credit history that could disqualify them from a mortgage loan, such as:
- Have credit debt that costs more than 20% of your income each month
- Frequent late payments
- Had a home foreclosed in the last 7 years
- Filed for bankruptcy in the past decade
- Repossession of items bought on an installment plan
If you have one or more of the following in your credit history, then it’s critical that you improve your financial status before applying for any kind of mortgage. The best and simplest way to do this is to pay off debts with high interest rates, such as student loans, personal loans, and credit card debts. Here are three tips to help you out:
- Stick to a strict budget for a while, cutting down on leisure or unnecessary expenses. This will allow you to redirect the money towards paying off your debts.
- Cancel rarely used credit cards to reduce the amount of available credit on your credit report or simply refrain from using them entirely. This can help you avoid adding more debt to your credit history.
- Consolidate your debt from several credit cards or loans onto one card with a lower interest rate. This can streamline your monthly credit payments and make the process more organized and efficient.
WHAT DO YOU NEED TO APPLY FOR A MORTGAGE?
Like most big financial loans, mortgage loans have a set of standards and requirements you need to meet in order to qualify for them. Here’s what you need when financing a home purchase:
The down payment is the amount you pay upfront in order to secure your mortgage loan.
With conventional home loans, this is usually around 20% of the home’s sale price, especially if you want to opt out of paying Private Mortgage Insurance (PMI). However, government-backed loans such as those from the Federal Housing Administration (FHA), US Department of Agriculture (USDA), and US Department of Veterans Affairs (VA) require a very low down payment (as low as 3.5%) or none at all.
THE RIGHT LENDER
Much like buying a home, you need to take your time searching for the right lender. Would you prefer a lower interest rate, at the cost of a higher down payment? This is ideal for those who want to pay less over the life of the loan. Or would you rather shorten your loan term, preferring a slightly higher interest rate instead? This is the better option if you want to pay off your mortgage as soon as possible.
Different lenders offer different benefits, and you need to see which one fits your current and future financial situation. Start by asking your own bank or financial institution, since they offer competitive rates to those who already work with them. You can also explore options from online lenders, community banks, and credit unions. Ask your friends, family, or Realtor if they can recommend reputable lenders as well.
A GOOD CREDIT SCORE
A credit score, also known as a FICO (Fair Isaac Corporation) score, is a three-digit number that represents your capacity to pay off debts based on your credit history. Having a high credit score means that you know how to manage your finances and credit debts well, which gives you a better chance of qualifying for good, low-interest loans. On the other hand, having a low credit score means that you are a potential financial risk for lending institutions, and this can make it difficult for you to qualify for a mortgage.
The credit score you need to have depends on the type of loan you want to have. Most conventional loans require a minimum credit score of 640. Government loans, on the other hand, have lower credit score requirements. For example, you can qualify for an FHA loan with a credit score as low as 500.
A LOW DEBT-TO-INCOME RATIO
Your debt-to-income ratio (DTI) is the percentage of your monthly income allotted for debt repayment, which can be calculated by adding up all your monthly debt payments and dividing it by your gross monthly income. Having a low percentage increases your chances of qualifying for a mortgage.
Different loans have varying DTI ratio requirements. Most conventional loans have a limit of 36% to 43%. DTI ratio limits for government loans fall within that same range, but they also offer special considerations and criteria. For example, FHA loans in Texas allow a DTI ratio as high as 57% if the borrower has several “compensating factors,” such as an excellent credit score or a higher down payment.
As mentioned earlier, we advise that your monthly debt payments shouldn’t be more than 20% of your monthly income at the time of your mortgage application. This allows you to have several options to choose from when it comes to financing a home purchase.
PAYMENT FOR CLOSING COSTS
These are the fees and charges you need to pay when closing on a home. Since closing costs only come around at the end of the homebuying process, many buyers are caught off-guard when they realize that the loan documentation wouldn’t be signed or the mortgage process wouldn’t be completed if these fees haven’t been paid.
On average, closing costs can range from 2% to 5% of the home’s sale price. This can include:
- Credit report fees
- Title insurance fees
- Escrow fees
- Survey fees
- Application fees
- Underwriting or processing fees
- Origination fees
- Recording fees
- Prepaid interest
When you apply for a mortgage pre-approval, your lender should give you a detailed estimate of these costs.
WHY DO YOU NEED A MORTGAGE PRE-APPROVAL?
A mortgage pre-approval is a letter from a potential lender that shows an estimate of the amount you can borrow, the kinds of loans you are qualified for, and the interest rates available to you. While it’s not a 100% guarantee of mortgage approval, it’s a powerful document that not only gives you an accurate overview of your purchasing power, but it also shows potential sellers that you are a serious and reliable buyer.
Unlike a mortgage pre-qualification, the pre-approval requires a hard credit check and an in-depth review of your finances. Applying for a pre-approval is technically the first step in your actual mortgage application, since it requires you to submit all the required information and documents listed above.
We recommend processing your pre-approval at least 90 days before your home search. This will give you enough time to find a home and be approved for the loan, and having the pre-approval letter on hand while looking through potential properties can give you an edge over the competition.
WHAT ARE THE DIFFERENT TYPES OF MORTGAGES?
There’s a wide variety of financing options to choose from, and it can be overwhelming for first-time homebuyers and even repeat buyers who haven’t entered the housing market in a long time.
To help you narrow down your options and make your search more efficient, here’s a guide on the most common types of mortgage loans:
MORTGAGE TERMS: 30 YEARS OR 15 YEARS?
Mortgage products are usually categorized into 30-year or 15-year terms. Terms are the length of time it takes to completely pay off the loan if you pay the exact minimum amount each month. So, if you have a 30-year mortgage term, then this means that your home purchase will be split into 360 monthly payments. A 15-year mortgage term, on the other hand, breaks the amount into 180 equal monthly payments.
Take note that a longer mortgage term means making lower monthly payments, while a shorter mortgage term means making larger payments each month. So, if you want to prioritize paying off your home purchase as early as possible – and you have the capacity to make those monthly payments – then a 15-year mortgage term (or shorter) is recommended. But if you plan on staying in this home for a long time, you can opt for a 30-year mortgage term.
FIXED-RATE MORTGAGE OR ADJUSTABLE-RATE MORTGAGE?
As its name suggests, fixed-rate mortgages are mortgage products where the interest rate remains the same for the entire term. For example, if you close on a 15-year mortgage this month with an interest rate of 5.99%, then your interest rate will remain the same for the next 15 years regardless of the rise and fall of the benchmark or index rate. This is the recommended option for those who prefer a stable investment strategy.
Adjustable-rate mortgages, also known as variable-rate or floating mortgages, refer to home loans that have a fixed interest rate for the first 5 or 7 years, which then resets according to the margin or index rate every year after. The initial interest rate for this type of mortgage is usually several points lower than fixed-rate mortgages, and it can be a better choice for those who plan to pay off their mortgage or move houses before the 5- or 7-year cut-off.
CONVENTIONAL MORTGAGE OR GOVERNMENT-BACKED MORTGAGE?
Conventional mortgages are the most common type of mortgage, and they are offered by many reputable banks and lending institutions. Government-backed mortgages, on the other hand, are specialized home-buying programs that assist certain demographics or marginalized populations in purchasing their own home. This includes:
- USDA loans, which are designed to encourage rural development by offering incentives for buyers who want to purchase property in rural areas.
- Federal Housing Administration (FHA) loans, which help low-income buyers by providing mortgage products with more lax requirements than conventional mortgages.
- VA loans, which assist veterans in buying their own home by offering competitive rates and less requirements than conventional mortgage loans.
If you’re eligible for any of the programs above, government-backed mortgages can greatly help with reducing the overall costs for your home purchase. If not, then conventional mortgages are the best financing option for you.
HOUSTON’S HOMEBUYER ASSISTANCE PROGRAMS
There are two homebuyer assistance programs in the Greater Houston metropolitan area that can help you finance a home purchase:
Houston Homebuyer Assistance Program (HAP). This program can provide up to $30,000 to first-time homebuyers, buyers who have not owned a home in the last 3 years, and buyers with a household income at or below 80% of the Area Median Income (AMI).
Homebuyer Choice Program. The first tier of this program applies to homes zoned for A- and B-ranked schools, subsidizing up to $150,000 of the homebuyer’s purchase. Tier two applies to other neighborhoods, offering up to $100,000 towards the buyer’s home purchase. Aspiring homeowners whose household income is at or below 80% of the AMI is eligible for both tiers,
NAVIGATE THE KATY, TX REAL ESTATE MARKET WITH THE JAMIE MCMARTIN GROUP
For over a decade and a half, the Jamie McMartin Group has helped countless homeowners in finding the perfect home in the Houston area. Providing an unparalleled level of service is a core value for our team, and this has allowed us to redefine real estate and the home buying experience for many of our clients.
Consistently placing among the top 1% of agents in the Houston Association of Realtors (HAR), the Jamie McMartin Group has been recognized as a top producing team by the Houston Business Journal (HBJ) for more than 6 years. With our bespoke strategies, consistent communication, and dedication to going above and beyond our client’s goals, you can rest assured that we will assist you from the mortgage pre-approval process to closing and move-in.