If you are in the market for Arizona homes loans for bad credit borrowers, you might want to consider and FHA hybrid loan program. This loan type combines the benefits of an FHA loan with an adjustable rate mortgage to give borrowers the best of both worlds.
If you have bad credit, a home mortgage is a valuable tool for rebuilding your credit, but it may seem almost impossible to obtain. Most banks will turn away borrowers with a credit score of less than 640. However, nearly 25% or 42.5 million credit using Americans fall into this category. If you find yourself searching for Arizona homes loans for bad credit
borrowers, you might want to look into an FHA loan.
The Federal Housing Administration is a government agency that is responsible for helping to insure home loans. In order to qualify for an FHA loan, an applicant must make apply for and receive financing from an FHA accredited lending institution. The Federal Housing Administration then insures the lending institution against loss in case the borrower fails to pay their mortgage on time. The borrower pays an insurance premium for this service of 1.75% of the loan amount upfront (usually financed into the loan amount) as well as monthly PMI payments. In order to qualify for an FHA the borrower also has to make a 3.5% down payment at closing. This is a good option for borrowers who cannot afford a traditional 20% down payment or who have less than perfect credit. Banks and other lenders are more willing to lend to bad credit borrowers who qualify for an FHA loan because the borrower is insured against default.
Another type of loan that can help Arizona homes loans for bad credit
borrowers is an adjustable rate mortgage or ARM. An adjustable rate mortgage is a short term mortgage with a term of anywhere from 1 to 7 years. During your initial term the interest rate on your mortgage is very low, usually below the prime rate. This makes your payment relatively low as well. The lower monthly payment allows borrowers with bad credit to qualify when they may not be able to for a traditional 30 year loan. After the initial term of you loan, the interest rate resets and your payment may be higher. This can be a good option for someone who is on the road to repairing his credit and will be able to refinance to a 30 year mortgage at the end of the adjustable rate term. One thing to keep in mind with an ARM is that they require a 10% down-payment. This helps ensure that the property value will not drop significantly below the loan amount. One of the greatest risks of an ARM is that borrowers will not be able to make monthly payments once the interest rate increases.
A third, less well known type of bad credit loan is an FHA/ARM hybrid loan. The FHA will insure adjustable rate mortgages. This allows bad credit borrowers to take advantage of low interest rates. This interest rate is adjusted annually, based on market indices approved by FHA, and thus may increase or decrease over the term of the loan.
The FHA Hybrid provides for an initial fixed interest rate for a period of three or five years, and then adjusts annually based on market conditions and the terms set by the FHA. The FHA Hybrid loans allow up to a 1% annual interest rate adjustment after the initial fixed interest rate period, and a 5% interest rate cap over the life of the loan. The new payment after an adjustment will be calculated on the current principal balance at the time of the adjustment. This insures that the payment adjustment will be minimal even on a worst case rate change. This is preferable to a traditional ARM because it helps keep the payments relatively low, even when the interest rate increases.
For many lenders the FHA hybrid is preferable because it still allows the loan to be insured against default. For this reason it is also a better option for Arizona homes loans for bad credit borrowers because they will be more likely to qualify for this type of ARM. Finally, the hybrid ARM does not require the 10% down payment that a traditional ARM does. This makes it more ideal for borrowers without several thousand dollars in savings.
If you have bad credit, you might want to investigate an FHA hybrid loan to determine if it the right path to homeownership.
Call a mortgage broker to discuss your home loan options and determine if an FHA hybrid product is right for you. Federal programs change regularly and a broker can help ensure that you choose the best mortgage product for you. Don’t continue to let your bad credit hold you back. Find an Arizona mortgage broker today.
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