Houston is an ideal place for homeownership.When you combine the city’s affordability and robust economy with the overall favorable environment for home ownership—interest rates are still historically low—buying your first home in Houston is definitely worth considering. In this article we’ll look at why buying a home in Houston is a good idea, whether you’re looking to buy a home in Northwest Houston, the Heights, Uptown, Midtown or anywhere in between. Then, we’ll help you assess your own readiness for homeownership. Finally, we’ll walk you through the mortgage application and qualification process so you are ready to begin the home buying process.
Top Three Reasons to Buy Your First Home in Houston
- Houston, the fourth-largest city in the United States at 2.3 million residents, is a thriving and diverse city currently in the midst of a strong economic rebound.
- Housing in most of the city remains relatively affordable compared to major cities on the East Coast and West Coast.
- Potential for real estate appreciation exists—the diverse energy- and healthcare-based economy is better than local economies in much of the country.
Of course, if you’re already living in Houston, you know all this. And buying a house is about more than the desirability of the overall city, or even of specific neighborhoods. First and foremost, it’s about where you are, financially and otherwise. Let’s talk about you and how we can help you attain your goal of homeownership, as well as any other financial goals you may have.
How Close Are You to Being Ready to Buy?
Emotional and financial preparedness is a huge part of home buying decisions. Let’s take a look at where you are, and whether you are ready to buy a house.
- Down Payment: With an FHA loan, you can put as little as 3 percent down to purchase a home (plus closing costs—although the seller may be able to assist with those). Non-FHA mortgages will require 10% to 20% down (25% down if purchasing a multi-unit property for use as an investment property). Central Bank’s experienced loan officers can walk you through the variety of loans we offer.
- Extra Savings: It’s always a good idea to have 6 months of living expenses accessible in a savings account before you purchase a home, rather than using all of your savings as a down payment.
- Closing Costs: These can include anything from title insurance, to transfer tax, to paying the previous owners for the remainder of the year of property taxes, to one year upfront of homeowners’ insurance. Put all of these together, and they often amount to 2-5 percent of the loan, depending on your circ*mstances. The average closing cost in Houston is $2,175, but you’ll receive an estimate of closing costs as part of the mortgage qualification process.
Is the time right for you to become a homeowner? At Central Bank, we understand that buying a home isn’t just about finances. Family considerations, job stability, and other factors will influence your decision. Come talk to our Houston-based loan officers--we understand the local real estate market and we can help you reach the best decision for you. Relationship-focused banking and individualized service are at the heart of everything we do.
You're Ready to Buy — What Are the Steps?
If you’re on solid financial footing, and you (and your family members) are in agreement you’re ready to take the next steps toward home ownership.
First, You’ll Need to See What Kind of House You Can Afford
Lenders work with what are called “front-end” and “back-end” ratios to determine whether you can afford a house. 40/45 is a typical ratio. Let’s look at what that means.
- Front-End Ratio: Let’s say your household income is $80,000 a year. This would mean that your monthly income is $6,666.67 a month. The 40 signifies the % of this gross (that is, before any other spending) income that you could spend on a house, including the mortgage, the property tax, and the projected insurance (which is usually “escrowed”, meaning that the bank pays it for you and you pay the monthly payments directly to the bank). 40% of $6,666.67 is $2666.68, meaning that your loan payment (principal + interest), monthly insurance, and property taxes must in sum be less than this amount monthly.
- Back-End Ratio: However, our hypothetical person with an $80,000 income has debts, it turns out. They owe $200 a month on credit cards and $150 a month on student loan debt. Your total debt for the back-end ratio must be less than 45% of $6,666.67 a month, which is $3000 a month. Given that your additional debt is $350 and the total of $3,000 is only $333.37 more than the amount arrived at using the front-end ratio, your back-end ratio determines how much house you can afford.
To put these sample figures in context, the average home price in Houston is $290,000, according to the Houston Chronicle. If you have a 20% down payment, you would take out a $232,000 loan. If the $290,000 home had $5800 in annual property taxes (most Houston homes have property taxes between 2% and 3% of the purchase price), your mortgage payment would break down as follows (assuming a $1000/year insurance policy and an interest rate of 4.5 percent.)
- Purchase Price: $232,000
- 30-year Mortgage at 4.5%, Monthly Payment: $1175.51.
- Monthly Tax Payment: $483.33/month
- Insurance: $83.33/month
- Total Payment: $1175.51 + $83.33 + $483.33 = $1742.17
So, this house would be considered affordable, though homebuyers should take their own spending into account as well, in order to determine whether a house is truly affordable. Contact us for more information about the mortgage prequalification and preapproval process.
1. Get Pre-Approved for a Home Loan
Your mortgage lender will pre-approve you for a loan amount based on the method described above. Note that realtors will usually ask for your pre-approval letter prior to showing you homes—they will not want to show you houses that you are unable to afford. This is why it’s important to start the homebuying process with your bank, before you set up home visits.
2. Start Looking for Your Ideal Home
Of course, there’s more to finding a home than simply crunching numbers. Some potential questions include:
- How many people are in your family?
- Do you have children living at home? Will you likely be having in-laws or other relatives moving in with you?
- What type of school are you looking for?
- What has been renovated, and what needs work?
- What's your vision for your home?
One way to create order in your home buying process is to create a systematic approach with a checklist, including potential neighborhoods, and a notebook to write down all of your observations concerning the houses you see.
3. Make an Offer
Your realtor will help you compose a competitive offer for the property based on the condition of the house and current market conditions. Your mortgage lender will have the house appraised to ensure your loan doesn’t exceed market value.
Prior to closing, you have the option of hiring a local property inspector (see the searchable directory here) to provide a thorough report on the house’s condition and any potential issues. You’ll also want to find an insurance company to provide homeowner’s insurance prior to closing.
The seller also provides a disclosure statement regarding the condition of the property, although these can be of variable detail and value. This is why a property inspection is recommended.
4. Provide the Final Documentation for Your Home Loan
Central Bank’s capable mortgage lenders are familiar with your community and dedicated to investing in the Houston area. We will guide you through every detail of the final documentation needed to secure your mortgage funding. Items include (but are not necessarily be restricted to):
- Recent W2s or 1099s to document current income
- 2 years of tax returns to establish historical income
- Any information related to debts (credit card statements, alimony if applicable, other mortgages, school loans)
- Several months of bank statements
During this time, you will want to try and avoid any major new purchases, particularly on credit.
5. Closing Day
The most important thing to remember on closing day, which is usually held at the real estate office of the seller’s agent, is that you’ll be signing a lot of documents. You’ll also need to bring multiple forms of identification. Additionally, if the closing costs are different from your estimate, you may need to bring additional money beyond the cashier’s check you will have drawn from your final estimate. On the other hand, you may get some money back. Be sure to ask your realtor during closing if you have any concerns about the documents you are signing. And then, the keys are yours!
Partner with your local Houston mortgage lender
Since 1956, Central Bank has been helping Houston residents become homeowners. Partner with your community bank for all of your mortgage and banking needs. Want to learn more about the financing portion of the home-buying process? Our Houston loan officers are here to help. Give us a call at 832.485.2300 or visit one of our four branches in Houston today.
