FHA Loans in Arizona: Understanding Down Payment and Closing Costs

An FHA loan allows anyone to achieve their dream of homeownership. Backed by the Federal Housing Administration, FHA mortgages have lower credit requirements than conventional loans, and they often have more advantageous interest rates. While FHA financing has lower down payment requirements than Fannie Mae or Freddie Mac loans, there are still some upfront costs…

Written by

Tyler Arnaiz

Published on

September 17, 2024

An FHA loan allows anyone to achieve their dream of homeownership. Backed by the Federal Housing Administration, FHA mortgages have lower credit requirements than conventional loans, and they often have more advantageous interest rates.

While FHA financing has lower down payment requirements than Fannie Mae or Freddie Mac loans, there are still some upfront costs associated with these mortgages. This article will explain the FHA home loan program, including its loan limits, closing costs, and down payment stipulations.

What is an FHA Loan?

FHA loans are backed by the Federal Housing Administration, a part of the Department of Housing and Urban Development, but are underwritten by private lenders. The federal government will repay a portion of the home loan to the lender if the borrower defaults.

These loans are geared toward first-time homebuyers with low credit scores or little credit history, helping them purchase a primary residence and achieve their dream of home ownership.

Borrowers can provide lower down payments than for a conventional loan, and the interest rates are generally more advantageous, allowing for lower monthly payments.

There is no gross monthly income cutoff, and down payment assistance programs are available to help homeowners afford their property.

While most homeowners use an FHA mortgage to buy their first home, it’s also possible to purchase multi-unit rental properties or vacation homes, as long as the homeowner lives in the property most of the year.

Arizona FHA Loan Limits

There are maximum loan limits for FHA loans, which differ by county. The higher loan limits of a conventional loan are adjusted in relation to the local average market value.

In most places, the maximum loan amount for an FHA loan is $498,257, but high-cost counties may have higher FHA loan limits. There are different limits for a single-family home than for multi-unit property, and you can secure FHA loans for buildings with up to four units.

These are the current Arizona FHA loan limits by county:

Single Family HomeDuplexTriplexFourplex
Apache County$498,257$637,950$771,125$958,350
Cochise County$498,257$637,950$771,125$958,350
Coconino County$525,550$672,800$813,250$1,010,700
Gila County$498,257$637,950$771,125$958,350
Graham County$498,257$637,950$771,125$958,350
Greenlee County$498,257$637,950$771,125$958,350
La Paz County$498,257$637,950$771,125$958,350
Maricopa County$530,150$678,700$820,350$1,019,550
Mohave County$498,257$637,950$771,125$958,350
Navajo County$498,257$637,950$771,125$958,350
Pima County$498,257$637,950$771,125$958,350
Pinal County$530,150$678,700$820,350$1,019,550
Santa Cruz County$498,257$637,950$771,125$958,350
Yavapai County$498,257$637,950$771,125$958,350
Yuma County$498,257$637,950$771,125$958,350

FHA Loan Down Payment in Arizona

Your down payment is a percentage of your home’s purchase price which you provide to your lender to close on your mortgage and home sale.

A down payment helps protect mortgage lenders in case of default, but it also helps the lender. Putting money down reduces your monthly mortgage payments and helps you save on interest over the life of your loan. By paying more on your FHA loan upfront, you will build equity faster, helping you meet your financial goals.

FHA loans are known for having looser down payment requirements than conventional mortgages, helping those with less money afford their dream homes.

Minimum FHA Loan Down Payment

The specific dollar amount of your down payment will depend on the sales price of your home and how much your lender expects you to provide. FHA guidelines also determine the expected down payment based on your credit score.

You can qualify for an FHA loan with a credit score as low as 500, but if your score is between 500 and 579, you will need to provide a 10% down payment. Those with a 580 credit score or better can qualify for the 3.5% down payment option, greatly reducing their upfront expenses.

FHA Loan Down Payment Assistance

Even with a lower down payment, prospective homebuyers may still find it difficult to gather such a large lump sum.

Thankfully, Arizona has the Home Plus FHA Loan Program, which can provide up to 5% in down payment assistance for qualifying borrowers. This is an interest-free second loan which requires no monthly payment and is forgiven monthly over the first three years of your loan. If you stay in your home for three years without refinancing, the loan is completely forgiven.

To receive this assistance, you must qualify for an FHA loan on a home of up to four units. Those buying manufactured homes are ineligible. You can have a debt-to-income ratio of up to 50%.

While an FHA loan doesn’t have any maximum income, the FHA Loan DPA program has a maximum income of $122,100 per year.

Closing Costs of FHA Loans in Arizona

Like conventional loans, FHA loans have some associated costs that must be paid before you can take ownership of your home. These costs are used to protect the lender and subsidize the cost of closing a loan. However, they differ slightly from a conventional mortgage. Overall, you can expect to pay between 2% and 6% of the overall loan amount in closing costs.

Mortgage Insurance Premium

Those using an FHA loan do not have to pay private mortgage insurance. Instead, they will pay an upfront mortgage insurance premium (UMIP) and an ongoing annual mortgage insurance premium. The UMIP has a base rate of 1.75% of the loan amount and is paid at close.

Lender Fees

Lender fees are fees paid to the lender for the cost of underwriting the loan. They include the origination fee, processing fee, application fee, credit check, document preparation fee, and a rate lock if you choose this option. The origination fee is generally between 0.5% and 1%.

Third-Party Fees

Additionally, you will need to pay for third-party services like an appraisal and title check to ensure your home is worth the value of your loan. The cost of an appraisal is generally between $300 and $400. A title search double-checks that the home can be legally sold by the seller, and it ranges in cost from $100 to $300.

Finally, title insurance protects the lender in case there is trouble with the title later. This typically costs between 0.5% and 1% of the total loan.

Other Expenses

There are a few other variable expenses associated with obtaining your American dream home. For example, if you live in a home with a Homeowners Association (HOA), they will have their own fees that you must pay.

You will also need to pay property taxes annually and at the time of sale. Property tax is determined by your county, and you will have to pay a prorated percentage of the standard rate to cover the time you spent in your home during the fiscal year of sale. Thankfully, Arizona has low property tax rates, averaging around 0.65% of the home’s value per year.

Homeowners insurance protects you and your investment from things like fire damage or plumbing issues. While it is not required by the state of Arizona, securing a policy is a wise decision. The average Arizonan pays approximately $2,163 per year for homeowners insurance.

How to Reduce FHA Loan Closing Costs in Arizona?

A number of the upfront costs associated with FHA loans can be negotiated by shopping around for providers for competitive prices on things like title insurance and appraisals. You can also negotiate with the seller to see if they will cover some of the expenses, like the remainder of the property taxes for the year.

Additionally, you can see if your lender is willing to roll these costs into your mortgage in the form of a no-closing-cost loan. While you will still have to pay the expenses, this option allows you to spread out the costs over time, helping you budget more effectively.

FHA Loan Eligibility

FHA loan requirements help protect mortgage lenders, allowing them to guarantee more mortgages. While the requirements are looser than with conventional mortgages, it’s still important to build your borrowing profile and credit history so you can take advantage of the most competitive rates.

Credit Score Requirements

FHA loans allow you to have as low as a 500 credit score as long as you pay 10% of the loan upfront. If you have a score of 580 or higher, you qualify for the 3.5% down payment requirement. As lenders can still change your interest rates based on your creditworthiness, you should work to improve your score as much as possible before applying.

Debt-to-Income Ratio (DTI)

Typically, you should have a debt-to-income (DTI) ratio of no more than 43%. This means that no more than 43% of your monthly income goes to other payments, like student loans or credit cards. However, some lenders will accept a DTI as high as 57%.

To prove your DTI, you will need to provide tax returns, pay stubs, and account information about any debts you may have.

Property Appraisal Standards

An FHA loan appraiser will not just assess how much a home is worth, but also whether it is safe for human habitation. The house must have a sound foundation and roof, and there must be no exterior damage like broken bricks or damaged siding.

There can be no lead paint, water damage, pest infestations, electrical issues, or plumbing problems. The appraiser will look to see if there’s proper drainage and check for heavy metal contamination in nearby soil.

An FHA appraisal is not quite as extensive as a home inspection required for a conventional loan, but it will uncover any significant issues that could pose a risk to your family. These appraisals are crucial for ensuring you’re not paying for a home that will need significant repairs. You can also order a home inspection to learn more about potential problems, such as radon exposure.

Pros and Cons of FHA Loan in Arizona

An FHA mortgage is an excellent pathway to homeownership, providing more relaxed approval guidelines and a low down payment requirement. As the government backs these loans and will compensate the lender should borrowers default, a mortgage company is more willing to work with those who may not otherwise qualify for a loan.

Additionally, Arizona’s FHA loan limits are quite high. The average home in the state costs only $352,536, meaning it’s possible to get an excellent home in a great school district and still access FHA loans. Assistance programs for Arizona FHA loans can further reduce the costs by offering a forgivable, no-interest second mortgage. You may have to pay nothing upfront aside from what the lender requires to approve and underwrite the loan.

However, there are some downsides to an FHA mortgage. For example, if you want to use an FHA loan to buy a second home, you will need to use it as a primary residence for most of the year. Plus, any homes you purchase with FHA loans need to be appraised for structural integrity, which costs money.

Despite these limitations, an Arizona FHA loan is very advantageous for borrowers who meet the guidelines, especially those who have less-than-perfect credit.

FHA Loans AZ Final Thoughts

FHA mortgages help everyone afford homeownership in the Grand Canyon State. Their high limits, low down payment requirements, and competitive interest rates make them incredibly helpful to those who may not be able to afford a home otherwise. Additionally, there is ample down payment assistance available.

Arnaiz Mortgage is here to support you in seeking FHA mortgages, unlocking the most advantageous rates on your behalf. Our loan officers will get to know your personal situation and match you to the perfect loan program for your needs. We can also connect you with down payment assistance programs to make it even more possible for you to afford your dream home. Reach out to us today to learn more about our offerings and to get started on your Arizona FHA loan application.