The Arizona housing market is as hot as its temperatures, and it’s showing no signs of cooling down any time soon! The best way to ensure you’re not missing out on the house of your dreams is to get your finances in order and be prepared to take out a mortgage.
This article discusses everything you need to know about qualifying for a mortgage in Arizona. It includes the pre-qualification process, mortgage requirements, Arizona down payment assistance programs, home loan options, and tips to help you qualify.
Ultimately, you’ll be ready to get your documents in order and start the process today!
Pre-Qualification Process for a Mortgage Loan in Arizona
Pre-qualification is the process of determining how much of a mortgage you qualify for. Mortgage lenders will review various aspects of your financial history to determine the maximum amount of funds you can borrow.
The best time to obtain a pre-qualification letter is at the start of your search so you can understand your budget and start looking at houses accordingly. To kick off the process, you will need the following elements.
Basic Documentation Required
You need to provide two forms of identification to start the process: primary and secondary.
Your primary form of identification could include:
- Driver’s license
- State ID
- Federal ID
- Passport
- Military ID
Your secondary form of identification could include:
- Social Security Card
- Student ID
- Utility bills
- Property Tax Bills
- Credit cards
- Voter Registration ID
You only need to provide one form of identification from each category to prove your identity.
Credit Score and Credit History
Your credit score tells lenders much about your financial history and your trustworthiness as a borrower. While the minimum credit score varies, you will typically want at least a 620 to get a conventional loan. If your credit score is lower, you may still qualify, depending on the loan type you are trying to get.
In addition to your credit score, lenders also pay close attention to your overall credit history. This includes any negative marks on your accounts, like missed payments, bankruptcies, or liens, as well as positive factors, like the length of your credit history, credit utilization, and more.
Debt-to-Income Ratio (DTI)
Mortgage lenders also consider your debt-to-income ratio (DTI), which is the total amount of your monthly payments divided by your monthly income. Ideally, your DTI should be 36 percent or lower.
There are two types of DTIs lenders typically consider during the pre-qualification process.
- Front end is the percent of your total income used toward housing expenses. This can include monthly payments, insurance, property taxes, HOA fees, and other eligible housing expenses.
- Back end is the front end plus everything else. This includes credit card payments, car loans, student loans, personal loans, and any other debt you carry.
Ultimately, your DTI is used to assess whether you can afford to make the monthly mortgage payment based on your current financial status.
Proof of Income
You will only be approved if you can prove you have the income to cover the cost of all your financial responsibilities. This is your proof of income or your income history, and you will need to provide your lender with documentation to back up your claims.
What you need to provide depends on what type of employee you are.
- W-2 Employees should provide their W-2 statements and tax returns for the last two years, most recent pay stubs, and two months’ bank statements. Additionally, you can bring pay stubs that reflect end-of-year overtime and bonuses.
- 1099 Employees or self-employed individuals should provide two years’ worth of 1099 forms, as well as business and personal tax returns. Additionally, they should share profit and loss statements, balance sheets, business bank statements, business licenses, investment account statements, and any additional income. You should also provide your lender with the Form 4506-T, which allows them to access your tax records.
Lenders like to see stability, so if you have had a lot of different jobs in the last few years, some mortgage lenders may consider this.
Additional Requirements for a Mortgage
Depending on the type of mortgage you are applying for, there may be some additional requirements. Your mortgage lender can help you navigate these and choose the best type for you.
Property Type
Some loans have restrictions on the property types you can use them on. Some, like VA loans, require them to be your primary residence and cannot be used on rental homes, investment properties, or vacation homes.
Other loans, like FHA loans, require the home to be either a single-family home, multi-family home (up to four units), manufactured home, or condominium.
Ask your mortgage lender about the property types you qualify for if you have any questions.
Down Payment
The minimum down payment required varies by loan type, and your credit score can also impact it. Typically, you must put down at least the following amounts on each loan to be approved.
- Federal Housing Administration (FHA) loan: 3.5 percent or 10 percent based on credit score.
- Veterans Administration (VA) loan: 0 percent
- US Department of Agriculture (USDA) loan: 0 percent
- Conventional loans: 3 percent
- Jumbo loans: 10 percent
Based on your down payment amount, you may be required to have mortgage insurance, which is an additional monthly premium.
Property Appraisal
A property appraisal is the process of assessing the fair market value of a house. The bank wants to know they aren’t overpaying for a home, especially if it’s subject to a bidding war.
If the home appraises for less than you’ve offered for it, you will only be able to get the loan for the price it is valued at. You will need to make up the difference if it is less than your offer.
Arizona Down Payment Assistance Programs
Arizona offers various options for a down payment assistance program. It can help with down payments for all types of buyers.
Home Plus
The Arizona Industrial Development Authority’s Home Plus mortgage program offers homeowners a 30-year fixed-rate mortgage loan. It also includes up to 5 percent down payment assistance as a second loan that can be forgiven after three years if you don’t sell or refinance the home.
You will need the following minimum requirements to qualify.
- 640 -680 credit score;
- Maximum 45 to 50 percent DTI;
- Primary residence within Arizona, including a single- to two-family home, condo, townhouse, or manufactured home.
This can be an FHA, VA, or USDA loan for first-time or previous homeowners.
Home in Five
The Maricopa County Industrial Development Authority and Phoenix IDA have another loan program for aspiring Arizona homeowners called Home in Five, which provides down payment assistance.
Like Home Plus, it is a 30-year fixed-rate loan with a three-year forgivable second loan (up to eight percent of the loan amount) that can be used for down payment or closing costs. If you don’t sell or refinance within the first three years, you do not need to repay the second loan.
You must meet the following minimum requirements for the Home in Five program.
- 640 credit score;
- Maximum 50 percent DTI;
- Maximum annual income of $138,600;
- Primary residence in Maricopa County, including a single-family home, condo, or townhouse, to be moved in within 60 days of closing;
- Complete the home buyer education course.
You can get an additional 1 percent in down payment and closing costs if you are a current or former member of the U.S. military, first responder, or teacher or earn less than $49,500 per year. An additional 0.5 percent in assistance is available for those purchasing in low-income areas.
Pima Tucson Homebuyer’s Solution
The Pima Tucson Homebuyer’s Solution program is available for those purchasing homes in Tucson or Pima County. You can qualify for up to 2-5 percent of the purchase price of your home.
You may qualify if you meet the following requirements:
- 640 credit score
- Income under $126,351
- Primary residence
You will need to complete homebuyer counseling to participate in this program.
Loan Options for First-Time Homebuyers
There are different loan options available for first-time homebuyers. While your mortgage lender can help you decide which is best, here’s a quick overview of the most popular types.
Conventional Loans
Conventional loans are common for any type of borrower, including first-time home buyers. Although they may have higher qualifying requirements, they end up costing less in the long run than other types of loans.
If you put at least 20 percent down, you will not be required to carry mortgage insurance. If you put less down, you can remove the mortgage insurance once you hit 20 percent equity in your home.
Government-Backed Loans (FHA, VA, USDA)
The U.S. government insures government-backed loans, which may make them more accessible to those with less-than-stellar credit.
- FHA loans are best for those with lower credit scores and limited savings. You can put as little as 3.5 percent down if you have at least a 580 credit score, though you’ll need to carry mortgage insurance.
- VA loans are available for current, former, or eligible spouses of members of the U.S. military. No down payment is required for VA loans.
- USDA loans are available in select rural areas. No down payment is required, but you need at least a 640 credit score.
Jumbo Loans
Jumbo loans are used to finance luxury properties. They exceed the limits set by the Federal Housing Finance Agency and cannot be purchased, securitized, or guaranteed by Fannie Mae or Freddie Mac. Because of this, there are very stringent credit requirements, and the loan amount will vary based on location.
Tips to Qualify for a Mortgage, Arizona
Now that you know a bit about the pre-qualification process and the different loan types, here are a few tips to help you qualify for a mortgage in Arizona.
Improve Your Credit Score
Your credit score is one of the most significant factors in qualifying for a mortgage. If you know you are going to start the process, take steps to improve it.
Be sure to make your payments on time, pay down your balances to keep your overall credit utilization under 30 percent, and avoid unnecessary credit inquiries. You want to do what you can to boost your credit score.
Get Pre-Qualified
Before you start searching for a home, get a pre-qualification letter. You look like a more attractive buyer to sellers if you can show you qualify for the home. This can make for a smoother process with your real estate agent and prevent you from searching for homes you cannot afford. Your letter outlines the maximum purchase price for which you qualify.
Calculate Your DTI
Your DTI is your total debt compared to your monthly income. To calculate this, you need to total your total fixed monthly costs and divide it by your monthly income.
For example, your monthly income is $15,000, and you have a $1,500 mortgage, $2,000 in credit card payments, $500 in car payments, and $200 in student loans. Your total DTI is 28 percent.
The lower your DTI, the better.
Summary
Arizona has a great housing market, and different programs are in place to help with down payment assistance.
As you navigate through the process of applying for your mortgage loan, Arnaiz Mortgage can help, starting with the pre-qualification process. We can help you understand what loans are best for you and which you qualify for, and we can shop around to get you the most competitive rate.
Qualifying for a mortgage in Arizona doesn’t have to be intimidating. What are you waiting for? Contact us at (623) 806-4645 or tarnaiz@arnaizmortgage.com today to start the pre-qualification process and find your dream home!