Choosing a mortgage can feel a bit like venturing into unfamiliar territory without a map. If you’re searching for Arizona home loan programs, we’re here to help you navigate your financing options with a bit of a crash course on the different mortgage types and the best home loans for first-time buyers.
Types of Home Loan Programs in Arizona
What is a mortgage? It’s a loan used to purchase a home, land or other types of real estate. The property itself serves as collateral for the loan, with the borrower paying the lender over time, usually 15 or 30 years.
There are several kinds of mortgages, each with its distinctions and advantages, that Arizona home buyers should know:
A conventional mortgage (sometimes known as a “traditional mortgage”) broadly refers to any home loan not insured by the federal government.
These loans can be further broken down into two sub-groups: conforming and non-conforming loans.
Conforming loans adhere to lending rules established by the Federal National Mortgage Association (aka Fannie Mae) and the Federal Home Loan Mortgage Corporation (aka Freddie Mac). Non-conforming loans do not, which can offer home buyers more flexibility when they’re buying a home.
Typically, a conventional mortgage offers the most favorable interest rates. However, the flip side is that buyers need to have good credit and potentially a large down payment. If you’re unable to make a 20% down payment, your lender may require you to purchase Private Mortgage Insurance (PMI), which can add to your costs.
These loans are ideal for home buyers with:
- Strong credit (620 or above)
- Stable income
- Few other debts
- 3% to 20% to contribute as a down payment
During the application process, you’ll need to provide documentation of your current assets and debts. You’ll also be subject to a credit check to verify your eligibility and set your interest rate.
Jumbo loans are technically a subcategory of conventional loans, but the main difference is that they don’t conform to federal loan limits.
For example, the 2021 federal loan limit in the United States averages around $550,000 for single-family homes. Jumbo loans can be found in high-cost areas and therefore tend to be used for affluent buyers.
The interest rates of jumbo loans tend to be competitive with other conventional loans but can be harder to obtain.
To qualify for a jumbo loan, you can expect to need:
- A down payment of 10% to 20%
- A credit score of 700 or better
- A debt-to-income ratio of 45 or better
You will likely also have to demonstrate you have significant assets in addition to your down payment, usually 10% of the total value of the loan.
Fixed-rate mortgages are a subcategory of other mortgage types. You can find a fixed-rate mortgage that’s either conventional, VA, FHA or jumbo.
Fixed-rate mortgages maintain the same interest rate throughout the life of the loan. They’re generally offered in periods of 15, 20 or 30 years.
Homeowners looking for stability can find value in a fixed-rate mortgage, especially if planning to stay in the home for at least 10 years. Because these fixed-rate payments never change, it’s easier to plan a monthly budget. On the other hand, longer mortgage periods can lead to homeowners paying higher interest levels over time.
Adjustable-Rate Mortgages (ARM)
An adjustable-rate mortgage (ARM) offers interest rates that can rise and fall depending on market conditions. This mortgage type carries some risk since market conditions may result in low interest rates at times. But it can also lead to homeowners paying cripplingly high interest at other times.
Some ARM programs offer interest rate caps that prevent you from facing financial hardship if the rates should dramatically rise. Other ARM programs start as a fixed-rate mortgage, then switch to an ARM after a few years.
ARMs can be a good option for homeowners who don’t plan on staying in their homes for long. Though there’s some risk involved, this can save money on your monthly bills. Keep in mind, however, that your monthly payment could change as the interest rate is adjusted.
The U.S. government isn’t a mortgage lender in the traditional sense, but there are three different government agencies that back home loans:
- The Federal Housing Administration (FHA loans)
- The U.S. Department of Agriculture (USDA loans)
- The U.S. Department of Veterans Affairs (VA loans)
These programs tend to favor those who have lower credit or lack the cash to make the down payment required for other mortgage types.
These loans may also be subject to specific requirements that relate to the overall condition of the home.
These government loans can be ideal for first-time home buyers who qualify.
Best Home Loan Programs for First-Time Home Buyers
Millennials represent the largest generation in U.S. history, yet their rate of homeownership remains well below that of their parents or grandparents at the same age. This isn’t about a change in priorities, as many young adults list homeownership among their goals.
The problem, according to CNBC, is that young adults struggle to come up with enough savings to make a down payment. Rising student loans have also made it harder for millennials to have a favorable debt-to-income ratio, even when purchasing a home with a spouse.
Several Arizona home loan programs can make it easier for first-time home buyers, including some of the government programs we listed above. Let’s take a closer look at each:
The Federal Housing Administration insures FHA loans. These loans can make homeownership more accessible for first-time buyers with lower credit, a shorter credit history or less income.
If your credit score is at least 580, you can secure a loan with as little as 3.5% down. For credit scores between 500 and 579, you’ll need to put at least 10% down. Know that if your down payment is less than 20%, you’ll be required to pay FHA mortgage insurance, which includes a fee of 1.75% in addition to annual premiums.
These loans can make homeownership a reality for many first-time buyers. Still, Arizona homeowners may find that FHA requirements can narrow down their options in the homes they choose, as homes must be in a safe and habitable condition as determined by an appraiser.
USDA loans are designed for rural and suburban home buyers. They’re typically used for low-income families who might otherwise not meet the eligibility requirements of other loan types.
The advantage of USDA loans is that they don’t require any down payment. However, you’ll still need to meet some basic requirements regarding your income and your home must be located in an approved, rural setting.
If you or your spouse are a current or former member of the U.S. military, you may be able to secure a loan through the U.S. Department of Veterans Affairs. It will depend on the length of time served.
VA loans do not require a down payment, nor do VA loans require any form of mortgage insurance. A funding fee may be attached to the loan, though this can easily roll into your monthly premium payments. Qualifying veterans may be eligible for a reduced funding fee.
This loan applies to:
- Current military personnel and their spouses who have served for a specific length of time
- Former military personnel that have been honorably discharged after a specific length of service
- Survivors of deceased servicemen and servicewomen
If you meet these criteria, then a VA loan can be a great option to secure funding for your first home.
Good Neighbor Next Door Program
The U.S. Department of Housing and Urban Development (HUD) sponsors the Good Neighbor Next Door program. It’s aimed at those who are working in the following professions:
- Law enforcement officers
- Emergency medical technicians
- Teachers (pre-K through high school)
This program allows you to receive 50% off a home in a “revitalization area,” though you’ll be required to live in the home for at least three years. The program’s website allows you to search for qualifying properties and includes listings in Arizona.
Still, the requirements are narrow, and some qualifying areas may not be immediately desirable. But those who make the commitment can receive a substantial discount on a home.
Refinancing Options in Arizona
Naturally, we can’t talk about Arizona home loan programs without also talking about refinancing options.
What is refinancing? When you refinance your home, you’re essentially eliminating your current mortgage and replacing it with a new one. Refinancing can help secure a better interest rate, shorten your mortgage term or convert your home’s equity into cash.
There are several types of refinancing options available. We’ll cover three of the most common:
Rate-and-term refinancing allows you to replace your existing mortgage with a new one, securing better interest rates and likely a new term length.
This type of refinance can be completed through the following loan types:
- Conventional mortgages
- FHA loans
- VA loans
- USDA loans
This also means you can change mortgage types. For example, you can convert from an FHA loan to a conventional mortgage, provided you meet the criteria. The requirements will remain the same, so this option is best for those whose credit scores or debt-to-income ratios have improved since they first secured a home loan.
Cash-out refinancing allows you to take out a mortgage that’s slightly larger than the remainder of your loan. You can use the extra money for such expenses as:
- Home improvements/repairs
- Purchasing a new vehicle
- Debt consolidation
- Funding education
Lenders commonly require you to keep at least 20% equity in your home, which means your loan may be limited.
For example, imagine you bought a home for $200,000, and you pay down the mortgage over time to $100,000. This means you have 50% of your home’s value in equity. The maximum loan you could likely borrower on a cash-out refinance would likely be $160,000, or 80% home of the home’s value.
Streamline refinancing is reserved for those with government-backed loans. It cannot be used for conventional mortgages. In a streamline refinance, you can refinance your home typically without an appraisal and minimal documentation.
This can be a good option if your home has lost value, because the value of your home won’t impact your mortgage rate. Also, since you won’t have to go through the same approval process, it can be a good option if your finances aren’t as strong as they were at the time of the original loan.
Home Loan Programs Near Me
We trust you’ve gained some insight into Arizona home loan programs. If you’re pursuing homeownership, our Phoenix-based team at Agave Home Loans is here to help. Our commitment to our clients has made us one of the area’s most trusted sources of financial assistance.
Contact us today, and we can guide you through every step of your journey toward homeownership.
Marshall spent seven years in hospitality and the restaurant industry prior to beginning a career in real estate and lending. After obtaining a finance degree with an emphasis in investments from Northern Arizona University, he began working at Quicken Loans. He spent seven years there as a banker and then Senior Director prior to co-founding Agave Home Loans. (NMLS ID: #1107208)
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