A bad credit score in terms of obtaining a home loan is classified to be at or below about 640, but this has varied with time and location. However, according to national credit bureaus, the average American’s credit score is around 678, meaning that most people don’t have perfect credit. If you have bad credit, there are a number of events that could have gotten you there that are beyond your control. Divorce, job loss, inability to make mortgage payments due to an over-inflated housing market, and the recent recession are all factors that have negatively impacted may people’s credit scores.

Approximately 42 million Americans have a sub-prime credit score. A home loan can be a good way to rebuild your credit as long as you plan on making on time payments. One program that is available to sub-prime borrowers seeking an Arizona home Loans with bad credit is an adjustable rate mortgage or ARM.

An ARM is a mortgage that is different than a 30 year mortgage in that it is for a shorter period of time, anywhere from 1 to 7 years. The most commonly offered types of ARMs are 3 and 5 year ARMs. During that time period you have a low interest rate, usually below the prime rate. This low rate means lower payments. The lower monthly payments helps many individuals and families qualify for an ARM who would not be able to qualify for the higher payments of a traditional mortgage. After the initial period, the rate of an ARM adjusts or resets to a higher than prime rate. This will increase the monthly payment amount based on the interest rate you are being charged. Every ARM has certain maximums depending on the type of loan. There is a maximum amount you can be above the prime rate as well as a maximum number of times the loan can reset.

One of the major criticisms with adjustable rate mortgages has to do with what happens after the rate adjusts. Because the interest rate increases, the amount of your monthly payment will also increase. In the mid-2000s, the increase in payments combined with the decline in the housing market led to a large number of sub-prime foreclosures. This has led to many law makers and media outlets to criticize ARMs as being irresponsible lending practices. However, an ARM can be a good option if you are smart about how you use it.

An important thing to keep in mind with an adjustable rate mortgage and really for any Arizona home Loans with bad credit, is to not borrow more than you can afford. If you cannot afford the payment on a $200,000 mortgage at a 30 year rate, do not borrow that much using an ARM, unless you are planning to move long before your rate resets. In addition, make sure to make smart real estate choices. Before you purchase a home look at the area and the overall price history. Don’t buy unless you are relatively certain that the home will increase in value. Also keep in mind that federal regulations require a 10% down payment up-front. Make sure that you have this money available before you close on your ARM loan or you will not be able to close. If the 10% down payment is more than you have available in savings, you might want to consider and FHA adjustable rate hybrid option. This loan type offers many of the benefits of an ARM with a lower down payment and government insurance.

ARMs for Prime Borrowers

An adjustable rate mortgage is a great program for borrowers needing an Arizona home Loans with bad credit, but it is also a great option for prime borrowers in certain situations. An ARM allows you to take advantage of low monthly payments and can save you a significant amount in interest payments. If you are wanting to purchase a property and will be able to sell or refinance before the rate resets, an ARM can be good option even if you would qualify for a traditional mortgage. Many savvy borrowers take advantage of adjustable rate mortgages to make real estate investments and purchase fix and flip houses.

Find a mortgage broker to fully discuss your home loan options and determine if an adjustable rate mortgage is a smart financial decision for you. 

Dennis Dahlberg
Broker/RI/CEO/MLO