An FHA loan is a home loan backed by the Federal Housing Administration. It is a type of mortgage that allows lower income and bad credit borrowers to obtain home loans. If you are searching for Arizona mortgages for bad credit, and FHA loan may be the perfect option for you.

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 mortgages for bad credit borrowers, you might want to look into an FHA loan. There are FHA loan programs with a FICO Score as low as 550.

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 arrangements with an FHA accredited lending institution. The federal government via 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 .8% 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.  An FHA loan primarily serves individuals who cannot afford to make a traditional down payment or who may have less than perfect credit.

Banks and lenders are more willing to give out FHA loans as Arizona mortgages for bad creditbecause there is a two tiered system of insurance to prevent loss in case of default. The first type on insurance is an upfront payment that is rolled into the cost of the loan. The second type of insurance is a mortgage insurance premium or MIP. The MIP is paid monthly and is added onto the cost of the mortgage payment. The MIP is a percentage of the loan amount that is determined by the value to debt ratio of the property as well as the length of the loan term. If you decide to obtain and FHA loan, it is important to keep in mind that you will make higher monthly payments due to these types of insurance.

The FHA Loan Process

If you have been researching Arizona home loans for bad credit and have decided that an FHA loan is a good option for you to purchase Arizona real estate, it is important to know what to expect in the qualification process. One key detail is that the Federal Housing Administration does not make loans. In order to obtain a loan you need to find an FHA approved bank or mortgage broker. Each bank can set its own interest rates and loan terms so it is important to shop around. A mortgage broker may be a better option because a broker can shop different banks for you to find the most favorable loan terms.

Once you have found a lender, the lender will assess you and determine if you qualify for a loan. You will be asked for proof of income and the lender will run your credit. If you have bad credit, you may be charged a higher interest rate but will often still qualify for an FHA loan due to the government backing. In addition, FHA loans allow for certain economic set-backs that can allow many bad credit borrowers to qualify for a home loan.

If you have little credit or bad credit, the FHA will also allow for a co-signer or co-borrower. Unlike other loans, the co-borrower does not have to live at the property with you but you can use their credit score to help you qualify for the loan. The FHA also has a hybrid adjustable rate mortgage program that can allow borrowers with high debt to income ratios to take advantage of low interest rates to purchase a home.

As with all loans, there are pros and cons related to FHA mortgages. They can be a good tool to help low-income buyers or borrowers with bad credit, or first time homebuyers without the resources to make a hefty down payment. It is important that you meet with an Arizona mortgage broker to discuss FHA loans along with other programs related to Arizona mortgages for bad credit. Talking with a broker will ensure that you know all your options and can make an informed decision about your home purchase.

Dennis Dahlberg
Broker/RI/CEO/MLO