If you have bad credit you probably are not able to qualify for a traditional home loan through your bank. However, despite your credit score, there are many Arizona bad credit mortgage lenders that can work with you to find different loan types and programs to purchase a home.

Bad credit can affect your entire life. You may feel that your credit score is hanging over your head, keeping you from qualifying for car loans, mortgages, credit cards, and may even keep your from getting certain jobs. If your credit score is below 620, you probably think that owning a home is beyond your reach. As depressed as you may feel about your credit, it is important to know that you are not alone. Nearly 25% of credit using Americans have what is classified as sub-prime credit, meaning that their FICO score is below 620. In addition, the average credit score is about 640 meaning that most Americans do not have an “excellent” or even “good” credit rating.

With many Americans falling into the “fair” or “poor” credit classifications, there are many Arizona bad credit mortgage lenders that can help sub-prime borrowers secure a home loan to purchase a residence or investment property. If you are searching for a bad credit home loan, it is important to know all of your options as far as loan types. If you have a less than stellar credit rating your best bets for a home loan are an FHA loan or an adjustable rate mortgage.

An FHA loan is a loan that is backed by the federal housing administration. This is a branch of the federal government. The FHA does not give out loans. Rather, they give the banks or other lending institutions mortgage security. Once a borrower is approved by the federal housing administration, the government backs, or insures the loan. If the borrower ends up defaulting, the lender can recoup its lost funds from the FHA. An FHA loan can benefit you as a bad credit borrower because banks will be more likely to lend money to you. Also, the FHA has specific programs like “Home in 5” or the “Home Affordable Refinance Program” that are meant to benefit borrowers who may not have good enough credit for a traditional mortgage. Some things to keep in mind about an FHA loan is that the credit will cost you more than a traditional loan. To secure the loan you will have to make monthly mortgage insurance premiums or MIP payments. These can add anywhere from 80 to 300 dollars a month to your housing payments. However, there are options as far as seller assistance or up-front pay down programs you may want to look into to help reduce your monthly mortgage payments. In addition, you will need to make a 3.5% down payment when you purchase the home so make sure you have this amount in savings.

Another type of loan you will want to discuss with your Arizona bad credit mortgage lenders is an adjustable rate mortgage or ARM.  An adjustable rate mortgage is a mortgage with an interest rate that adjusts after a fixed period. The fixed period is anywhere from 1 to 7 years, with the most common terms being 3 or 5 years. During the initial fixed period, the interest rate on the loan is very low, usually lower than prime. This means that your monthly mortgage payments will be low. After the fixed term, the rate will adjust to a higher interest rate. This will increase your monthly payment amount due to the higher interest payments. When your interest rate does reset, it will be to a higher than prime rate. An ARM is a good option for bad credit borrowers who are planning on moving before the rate resets, or who are in the process of rebuilding their credit and will be able to refinance to a traditional mortgage at the end of the fixed rate period. One important note about an adjustable rate mortgage is that it will require a 10% down payment so make sure that you have that to put down on your home.

Many borrowers with bad credit are still leery of investing in bad credit mortgage programs due to some of the bad press that has surrounded them. Bad credit mortgages and loans to sub-prime borrowers have been largely blamed for the housing crisis of the mid 2000s which resulted in many borrowers losing their homes due to foreclosure. Although some bad credit loans may have been to blame, it is important to note that other circumstances like an economic recession and falling housing values also played a key role in the foreclosure crisis. However, due to the negative press many banks shy away from sub-prime borrowers.

Banks are not the only lending institutions out there. There are many private investment firms and brokerage companies that will act as Arizona bad credit mortgage lendersfor individuals and families looking to purchase real estate in Arizona. A mortgage broker or mortgage company can help you find the right loan product and take the next steps in purchasing a new home.

Dennis Dahlberg
Broker/RI/CEO/MLO