What Factors affect FHA Home Loan Rates
Many prospective homebuyers, who do not qualify for conventional home loans, can usually qualify for FHA home loans.
This makes these loans quite attractive, especially if you have less-than-perfect credit. As long as you have money for the minimum down payment and satisfy a few other criteria, you could be a proud owner of a home. Before you celebrate and pop open the champagne, you should take a closer look at FHA home loan rates. You will figure out that while the rates are lower than conventional home loans, they can vary between lenders.
You may assume that because your FHA home loan is insured by the government, you will get the best possible interest rate. However, did you know that the FHA does not regulate, control, or even set the interest rates for FHA home loans? The interest rate for your FHA home loan is controlled and governed by the same factors as conventional home loans. The difference lies in the term of the loan and how the lender underwrites it.
This brings us to the factors affecting FHA home loan rates. There are several of them and you will be amazed how each factor plays a significant role in determining your FHA home loan rate.
Your credit score, perhaps, is the most important factor in determining the interest rate. It allows a lender to figure out how creditworthy you are. Just like for conventional home loans, you will enjoy lower interest rates if you have a high credit score.
FHA home loans have mandated a minimum FICO score. If your credit score is less than 500, you will not qualify for an FHA home loan even if you have the money to make the down payment. On the other hand, if your score is between 500 and 580, you will have to make a higher down payment than the minimum 3.5 percent. Typically, it is 10 percent or more. However, lenders usually prefer higher FICO scores, anywhere from 620 to 640, to approve an FHA home loan. But this is an unwritten rule and you will not find it listed in any rulebook.
Hence, if you want to get low FHA home loan rates, start with your credit report. Look for errors and outdated information, and have them fixed or removed. If your credit score is low, improve it by making timely and full payments on your credit cards and other debts.
FHA has made home loans as borrower-friendly as possible. It allows lenders, builders, and even home sellers to pay part of your closing costs, which includes a credit report, appraisal, and title expenses. If the lender decides to pay the closing costs, it will affect the interest rate, as your lender will charge you a higher rate.
So don’t be quick to take up this offer from a lender. Instead, spend time shopping and comparing the cost and interest rate from multiple lenders. This will allow you to make an informed decision so that you end up with an affordable FHA home loan that has a low interest rate.
It goes without saying that you can get an FHA home loan just from lenders that are approved by the FHA. However, it is prudent to remember that all lenders approved by the FHA will not have the same interest rate. The rate will vary even for the same FHA loan. This is because each lender has their own services, costs, and underwriting criteria.
This makes it even more important for you to shop around and find out the rates different FHA-approved lenders are charging. This will help you find a lender who offers affordable FHA home loan rates to suit your needs.
Regardless of the kind of FHA loan you are taking, you will have to pay two mortgage insurance premiums. One is the upfront premium, which is 1.75 percent of your total loan amount. You need to pay this premium at the time of getting the loan. It is possible to finance it as a part of your FHA home loan amount.
The other mortgage insurance premium is the annual premium that you have to pay monthly. This premium amount will vary based on the term of the loan, the amount you borrow, and your loan-to-value ratio. Typically, annual insurance premium is as follows:
- For a 15-year loan amount with a down payment less than 10 percent – 0.7 percent
- For a 15-year loan amount with a down payment of 10 percent or more – 0.45 percent
- For a 30-year loan amount with a down payment of less than 5 percent – 0.85 percent
- For a 30-year loan amount with a down payment of 5 percent or more – 0.8 percent
The annual mortgage insurance will have an impact on your overall interest rate as you will be paying it throughout the term of the loan.
Price of the Home
Another factor that affects the interest rate since it impacts the loan amount is the asking price of the home. It is important that you negotiate the asking price with the seller so that you can bring it down to a figure you can afford. However, this will not be the final price.
The price will be what the FHA appraiser determines as fair market value of the home. If the seller is asking for a price that is higher than the fair market value, you will need to renegotiate to decrease this price. Remember the FHA will insure just the loan amount that is equivalent to the fair market value. Anything over and above, you would have to pay from your own pocket.
It is not rocket science to figure out that the more down payment you make, the lower will be the interest rate. However, if your loan amount is too low (or too high), the FHA-approved lender will charge a higher interest rate. While the minimum down payment is 3.5 percent for FHA loans, but if you want a competitive interest rate, you should be looking to make a down payment between 10 to 20 percent.
There are so many factors that affect FHA home loans that it can be difficult to pinpoint just one. However, this is the best time to purchase your first home if you haven’t done it as of yet. Rents are surging across the country and in some parts renting a home is completely out of the question because the prices are so high and because there are some outstanding home prices out there.
FHA home loans are easier to get and you have the assurance of owning your own home. Remember, FHA home loans are assumable loans. So if you intend on selling your home before you pay off the loan, you will have to find a buyer who is more than willing to assume the loan. The home needs to be paid for right?