Types of Arizona home loans that make buying an obtainable dream

It’s not the avocado toast making home ownership unattainable; it’s the type of loan. Here are several lesser-known home loans that can make ownership a reality.

Millennial here. I understand how easy it is to fall into the trap of believing that it is impossible to buy a home in this climate. Social media, news sources, and casual conversation lead us to believe that the high price of housing equates to being lifelong renters.

Fortunately, I refuse to take “no” for an answer when it comes to dreams and have done extensive research to find pathways to homeownership on an average budget. I can tell you these pathways work, too, as I am sitting in a beautiful home that I own while writing this for you. In fact, my husband and I bought our house with only $1,500 in the bank to spend, and combined incomes that were less than the average median income for our county.

While the government has finally begun initiating bills to help curb the cost of housing, and there is nothing wrong with renting, owning a home is a tried-and-true investment. Many of us lived through the Great Recession in 2008 and can recognize that since that devastating epoch, the cost of housing has only gone up. This rise in price is tough on renters, whose leases can legally increase every year, while being great for homeowners, whose homes increase in value as the years go by. Joining the side of homeownership helps to weather these more precarious financial climates.

Below are all the basics you’ll need to begin your surprisingly affordable journey to homeownership. There are terms to know, links for helpful down payment assistance programs, typical steps to buying a house, as well as a list of loans that aren’t your traditional 20% down payment loans.

It is possible to buy a house on an average budget with very little savings if you are open to less popular pathways. And once you succeed, let’s join together and popularize these pathways. A “pay it forward,” if you will.

Shane and I outside of our house after the final walk-through. (Photo courtesy of Dawn Bunch)

Terms to know

• • A down payment is the upfront money that many loans require in order to buy a house. It ranges from a minimum of 3% to 20% of the total price of a house. For example, a conventional loan on a $300k house would require a $60k down payment.
  • A first-time buyer isn’t necessarily someone who has never owned property or land. Rather, it is someone who has not owned any real property for three or more years.
  • Real property is something that cannot be moved, like land or a site-built house.
  • Interest rates and buying down the rate can be a little tricky. An interest rate is the interest you will pay on a home loan, which can vary based on market averages and your credit score. Currently, rates range between 5% and 7%. When the rate is higher, like this, house prices tend to be lower. When rates go lower, house prices go higher. This is a general rule associated with how lenders are willing to fund. Buying down the rate is one way to get a lower-priced house AND lower interest. It requires quite a bit of money, though, which can either come out of your pocket or seller concessions.
  • Concession is the amount of money the seller is willing to offer the buyer at the end of a sale. It gets bundled up into the total loan price, but it is money that can be spent on closing costs, buying the rate down, or repairs that the house requires. Example: A seller offers $10,000 in concessions for a $300,000 house. The total loan remains $300,000, but the buyer now has the $10k to use as they see fit. This does decrease the money in the seller’s pocket at the end of the sale, so it is not guaranteed.
  • Earnest money is money that the buyer will have to give the loan officer to show serious intent to buy. While conventional loans require earnest money to be a certain percentage of the total, other loans can require smaller fees. We only had to offer $1,000 of earnest money thanks to our loan. This gets applied to the principal, or total of the loan, before interest fees.
  • Debt-to-income ratio, AKA DTI, refers to the amount of debt you have in regard to your income. This needs to be well below 50%, often as low as 36%, to be approved for a loan. Requirements vary from loan to loan.
  • Closing costs usually run 2-6% of the total sale price and cover agents’ and other various fees. Concessions can cover this, or deals can demand that sellers take care of these costs. While it is not unheard of for the seller to take these costs on, it is also not guaranteed.
  • Escrows are a type of trust in which the deed to the house is held until all paperwork and payments have been satisfied. Closing on escrow occurs when the account switches ownership from the seller to the buyer, and the buyer must now fulfill all requirements to officially own the home.
  • Prequalification letters, or PQ, allow you to seriously look at houses with the intention to buy. These letters take your basic financial information and estimate how much funding you can secure via any loan. Letters are typically valid for about 30 days, making it possible to submit an offer on a house.
  • Underwriting is a very exciting part of the loan process when your offer on a house has been accepted, and your loan agent is getting to the nitty gritty of your personal information and can help determine your monthly mortgage payments. If you were untruthful to get your PQ, this is also where you can lose your funding.
  • Counteroffers come from the sellers when a buyer makes an offer that isn’t ideal to the seller. This can go back and forth for weeks between both parties. It doesn’t always yield a successful outcome, either. In some cases, buyers will write a letter to the seller to humanize themselves, which can be effective at securing a compromise. It was effective for us as well as a couple of friends of mine. If you do this, be mindful of your pathos, logos, and ethos—keep them balanced.
  • Homeowners Associations, or HOAs, are a common feature of living in condos, townhouses, and certain types of constructed communities. HOAs require monthly or annual fees for maintenance of community spaces and often come with regulations on how the yard and front of the house must look. Sometimes these fees also cover roof repair, as well as water or other utilities. Often, these fees include a community pool or a play structure.
  • ARMS, or adjustable-rate mortgages, are a type of loan that can offer lower interest rates upfront, for a fixed period of time, but then fluctuate based on market conditions. If you know that you are going to sell or refinance your home before your initial period is up, this is a safe bet. If you think national interest rates will likely decrease by the time your adjustment period arrives, it is a good gamble. It is a gamble, though, and is not ideal for many people who prefer certainty of what a payment will be.
  • Fixed Rates are the most common approach to interest rates, as the rate you sign up for will be your rate for the entirety of the 10, 15, 25, or 30-year loan. The only way to change a fixed rate is to refinance, which often involves additional fees.

• PMI is also known as private mortgage insurance. If you are like us and don’t have the traditional 20% payment for a house, then PMI is a requirement. Yes, it adds on to the monthly mortgage, but gets you into the front door. It’s comparable to gap insurance that is required for newly financed cars.

Natalie and Logan used a first-time buyer’s loan to make their dreams of ownership come true. “Probably my proudest accomplishment,” she confesses. (Photo courtesy of Natalie Deitrick)

Down Payment Assistance Programs (AKA DPAs)

DPAs make PMIs mandatory in many scenarios, as the buyer is paying less than 20% of a down payment. However, it is also the only way most of us can end the game of renting and instead enter the journey of ownership. Oftentimes, a loan officer can guide you to the DPAs that are right for your situation, but doing research before making that call can always help empower you to be your own best advocate.

Section 32 Homeownership Program

The Section 32 Homeownership Program was created to help Phoenix families who make 80% or less of the area median income. This program provides financial assistance, along with helpful courses, to make homeownership more accessible.

Open Doors DPA Program

Also geared toward Phoenix residents who earn 80% or less of the area median income, the Open Doors DPA Program offers an interest-free loan of up to $44,000 to help with down payments and closing costs on a home in Phoenix. The house purchase price cannot exceed $447,000, so be sure to look into some of the less expensive neighborhoods in Phoenix.

Arizona is Home

Arizona is Home is an assistance program available throughout the state that helps individuals with incomes up to 120% of the area median income. The program offers $ 20,000-$30,000 in assistance to help with down payments, closing costs, and buying the rate down. The same program also offers fixed-interest rates in rural counties to lower-income individuals.

Different kinds of loans 

If you don’t have 20% for a down payment, don’t worry. Here are a few loans to discuss with your loan officer.

Conventional

A conventional first-time buyer’s loan requires between 3-5% down, a credit score of 620+, at least two years of employment at the same company, and a low debt-to-income ratio. This is the most common loan available, but many people don’t realize that you can secure it with as little as 3% down. As mentioned previously, a down payment of less than 20% requires PMI, but in the case of a conventional loan, once you have 20% equity paid off, the PMI can be dropped, thus lowering the monthly escrow payment. This is part of the appeal of this loan.

FHA

FHA loans are government-backed with better flexibility for many first-time buyers. Even with a credit score in the 500s and a DTI of up to 50%, down payments can be as low as 3.5%. FHA loans require heavier PMIs that exist for the life of the loan, offer competitive interest rates, can be transferred upon sale, but also require stricter standards on what kind of home can be purchased. FHA loans require strict assessments and inspections before a loan can enter underwriting. This translates into purchasing a home that is at fair market value and deemed safe. Although the stricter requirements are a hurdle to get past, the standards ensure a wise purchase choice.

USDA

USDA loans are designed for people interested in purchasing a home in a rural area. This loan is flexible and can be used to purchase, build, repair, or renovate a home and is backed by the U.S. Department of Agriculture’s Rural Development Program. With 0% down and an income of up to 115% of the area median income, this loan is appealing to anyone who is willing to live in a rural area. DTIs are a little less strict and can be up to 50%, higher credit scores result in better interest rates but aren’t necessary, and the inspection requirements are a lot more lenient than FHA loans.

USDA loans are a great way to build your dream home with land or to secure one of the best houses in an area. It is partly why you see many people in our generation promoting homesteading and going relatively off-grid. USDA loans make it possible. The only real catch is that within three months, the purchase, whether house or land, must become the buyers’ primary residence for the next two years.

Primarily living in a rural area may sound scary to many, but as someone who is using the USDA loan, I can say that moving to a small town has been a dream come true. With a stronger sense of community, a short hour commute to the conveniences of the Valley, and a view that makes every day feel like vacation, my husband and I count our country blessings every morning over coffee in the garden in front of the chicken coop. Shout out to Larry for sending info on the USDA loans; this has become the best chapter yet.

Veterans

VA loans are strictly for veterans, active duty military personnel, and surviving spouses, but they should not be overlooked. These loans offer options of 0% down, low fixed interest rates, and can be used for a variety of purposes, including home improvement or purchasing or building a home. The loan can also be used again and again for primary residences, unlike first-time buyer requirements. This loan is just one of the attractive benefits that those who served our country greatly deserve.

Jumping for joy after a long negotiation process, Rachel secured her first home with the help of a DPA program. (Photo courtesy of Rachel White)

The steps to buying a house

1) Look online to get a sense of what you want/need within your budget. I love looking at Zillow, and my husband loves Redfin.

2) Call a loan officer and chat. Talk about your financial situation with them and see if a loan is feasible. If they aren’t willing to work with any loan but conventional, try another office. Not all loan officers are willing to write non-traditional loans. We struck gold when we met with our fourth loan officer, who immediately discussed USDA and FHA loans as viable options.

3) Find a real estate agent and/or go to an open house. Going to an open house or two makes the process real, and you can meet an agent there if you don’t have any idea of where to find someone. Finding the right agent is a big deal because not only will they get paid when you buy a house, they will negotiate for you, look at countless houses for and with you, and in most cases, find houses based on wants and needs that are unique to you. They will be akin to your best friend in this process.

4) Put an offer on the house you feel at home in. If you love a house and feel like you don’t want to leave, put in an offer and begin the process. We decided to put an offer on our home when we realized we hung out in the kitchen for 15 minutes just talking. We didn’t want to leave because it felt like home. Pro tip: Be prepared to miss out on a house, even if you make an offer. The home we’re in is the fourth house we put in an offer for, and negotiations volleyed for two weeks.

5) Once your offer is accepted, call your loan officer right away. They will give you the timeline to schedule the assessor. The assessor makes sure that the house is being sold at fair market value. If the agreed-upon amount is higher than what the assessor determines the house to be worth, then you can either return to negotiations or come up with the difference between the worth and the agreed-upon amount. Example: A home offer is accepted for $305,000, but it is determined by the assessor to be worth only $295,000. You either need the seller to drop the price to $295,000 or come up with $10,000 out of pocket to secure the loan.

6) Schedule an inspection ASAP. You have seven days from the moment the offer is accepted to get an inspector through the doors. For some loans, this is a must. For all circumstances, a home inspection leaves out any guesswork about the house’s condition. While getting a home inspection can cost upwards of $500, it can cost extra to get the plumbing inspected. This is often highly recommended and usually worth the peace of mind.

7) Request repairs that the inspector recommended and begin the final negotiation process. If significant safety repairs are needed, the buyers may have to make the necessary repairs or offer concessions to have them made. This is often a requirement for FHA loans. Note that sellers reserve the right to say no. You also reserve the right to pull from the deal and move on at any point before step 9.

8) If repairs were made, you may need another inspection. If everything seemed fine, now is the time to do your final walkthrough to make sure you plan to finish the process.

9) Your final step is to sign paperwork—also known as closing escrow—and get the keys. Welcome home!

Closing thoughts (not costs)

While owning a home isn’t as simple as it was in decades past, a little bit of creativity can get you there. Owning a home allows you to customize a space as you deem fit. Ownership also allows you to build equity for the long term instead of helping a landlord do the same thing with the money you’d give them. And it makes you your own landlord, responsible for repairs and unexpected surprises, which can propel you into learning new handy skills, or create new financial priorities.

Owning a home means being your own landlord and learning new skills, such as Shane here, learning how to season our swamp box. (Photo courtesy of Trinity)

Owning a home isn’t for everyone, but if you are somebody ready to take that leap, may this home buyer’s guide empower you to begin the journey of homeownership. If you know of anyone else dreaming of ownership, send this their way. Other than the Arizona DPA programs listed, everything in this guide is applicable nationwide.

Warning: When you decide to begin the process,  you may need even more avocado toast and iced coffees to get to the light at the end of the tunnel. When the process is complete, you can even grow your own avocado tree. Here’s to the little treats keeping us all afloat.

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