Arizona FHA Loan

An FHA loan might be the reason you are able to purchase your first home. It was for me. The Federal Housing Administration is much more flexible than a typical lender on things like down payments and credit scores. I would bet that most first time home owners use an FHA loan to purchase their home.

What Makes an FHA Loan Different?

FHA Loans are Guaranteed
For Your Lender

It is true. In order to allow more people to become home owners, the federal government will guarantee the mortgage balance on all Federal Housing Administration (FHA) loans. If you default, the government will pay off the lender. This allows more Arizona mortgage lenders to loan money to home buyers.

But you will pay a higher interest rate and other fees for the privelege of the federal government guaranteeing your loan.

I didn't have much down payment money for my first home which was why I used an FHA loan. A conventional Arizona mortgage lender is going to be looking for a 20% down payment on the home. The FHA mortgae usually only requires a 3% down payment. Better yet, that 3% could be a gift from a family member.

Also a lender is going to be looking at your past few months of bank statements looking for irregularities. If they see a big deposit you are going to have to show proof that the money is yours. With an FHA loan, they don't really care where the money is coming from.

It is also easier to qualify for a an FHA mortgage loan. Because the loan is guaranteed by the government, lenders will accept borrowers with lower credit scores than they would for a conventional loan. You may even be able to qualify if you have filed for bankruptcy.

But there are strict FHA debt to income ratios. Click on the link to find out more on these debt to income ratios.

These are the nice things about FHA loans, but it's not all great. There are additional costs involved. Because the FHA is guaranteeing this mortgage to the lender, you are required to pay 1.5% of the total mortgage up front. This can be included in the mortgage. You are also required to pay a mortgage insurance premium annualized of 0.5% of the mortgage amount.

This premium is basically an payment of an insurance policy to protect the lender in case you default. If you default on your payments the insurance policy pays off the lender. I know what you are thinking... No you don't get to keep the home even if the insurance pays the lender. The FHA will take the home and sell it to recoup their costs.

It's not as bad as it sounds though. The FHA is in the business of making sure you keep your home. There are programs if you find yourself in a position where you can not afford your monthly payments. More so than with a conventional mortgage.

Warning About FHA Loans

Because FHA mortgages are often used by first time home buyers, the FHA sometimes has some strange requirements that you must do prior to closing. Lenders may not be up on all of the closing requirements, because these first time home buyer programs change quite often.

When I purchased my first home I had to read a book about home ownership and then call a phone number and be quizzed on the reading before FHA would approve my loan. One problem. No one ever told me! We were in the lenders office expecting to get our keys on the day of closing and all of a sudden this issue pops up.

You can imagine we were very upset at our mortgage broker for completely dropping the ball on this. We raised hell and somehow got the lender to sign off that we did it without ever doing it. I don't know how that happened. I didn't ask any questions. I just wanted the keys to our first home. Just be aware that little quirky things might pop up with an FHA loan for a first time home buyer.

The FHA offers both fixed and adjustable rate mortgages. You can also obtain a loan to fix up a home that is run down. There is a limit to the maximum amount borrowed. It varies depending on the county and state. In Arizona the loan amount is capped at $346,250.

This increase was passed by Congress in 2008, but is set to expire at the end of 2008. I am guessing Congress will extend the limit increase, but then again who knows.

Because a first time home buyer is not selling a home and rolling that equity into their new home you can see how the low down payment requirements often times result in the first time home buyer using an FHA loan. Even though the mortgage insurance payments can make the loan more expensive than a conventional loan over the entire life of the mortgage, it is better than paying rent!

Don't Be Fooled By Mortgage Scams

The FHA does NOT lend money or set interest rates. The only thing FHA is doing is guaranteeing your loan to the lender. You still need to shop around to make sure you are getting the best rates and terms that you can. Don't let an Arizona mortgage broker tell you that the rates they are giving you are the same for all Arizona FHA loans for the mere fact that it is an Arizona FHA loan.

Shop around, ask your trusted family and friends for a referral to a good mortgage broker, don't rely on the first thing you hear.

Once you are finished reading about an FHA loan, return to our Arizona Mortgage section.