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FHA Mortgage Rates
For most people, the main barrier to homeownership is saving up an adequate down payment. High rent, cost of living and housing prices can all make saving up for the standard 20% down payment feel impossible.
That’s where FHA mortgages come in. FHA loans are designed to help non-traditional buyers, buyers with lower credit scores or buyers with smaller down payments by offering more flexible loan requirements.
But while FHA loans can be a good fit for some buyers, there are pros and cons to FHA mortgages and plenty of other things to consider before taking that route to homeownership.
Current mortgage rates
According to Bankrate’s latest survey of the nation’s largest mortgage lenders, these are the current refinance average rates for a 30-year, 15-year fixed and 5/1 adjustable-rate mortgage (ARM) refinance rates among others.
|30-Year Fixed Rate||2.920%||3.230%|
|30-Year FHA Rate||2.820%||3.670%|
|30-Year VA Rate||2.840%||3.080%|
|30-Year Jumbo Rate||2.950%||3.060%|
|20-Year Fixed Rate||2.820%||3.140%|
|15-Year Fixed Rate||2.390%||2.720%|
|15-Year Fixed Jumbo Rate||2.400%||2.470%|
|5/1 ARM Rate||3.010%||4.060%|
|7/1 ARM Rate||2.920%||3.950%|
|7/1 ARM Jumbo Rate||2.840%||3.930%|
|10/1 ARM Rate||2.980%||3.910%|
Rates data as of 12/4/2020
What is an FHA loan?
An FHA loan, or a Federal Housing Administration loan, is a government-backed mortgage loan. This type of loan is aimed at buyers of single- and multi-family homes who may be struggling to obtain a conventional mortgage.
FHA loans require a minimum down payment of just 3.5% as opposed to the typical 20%. This makes them much more affordable and accessible for families who need a bit of extra help getting on the housing ladder. FHA loans also have more flexible credit scores than conventional mortgages, which means more buyers will qualify.
Because of this, FHA loans are incredibly popular with first-time homebuyers, those with low credit scores and those with smaller budgets.
[ Related: How Does Credit Score Affect Mortgage Rates? ]
While FHA loans are open to a wider range of buyers, the downside is that these types of mortgages require you to pay for extra mortgage insurance — no matter what your down payment is. The amount you’ll have to pay for this insurance is based on a few factors including loan amount, loan terms and the loan-to-value ratio.
Buyers who put less than 20% down a conventional loan are also required to pay for PMI. The difference is that those buyers are eligible to have the private mortgage insurance requirement lifted when they’ve built up 22% equity in the home. Buyers who opt for an FHA loan are required to pay that extra insurance cost for most (or all) of the life of the loan.
So, while FHA loans can be a solid option when you can’t obtain a conventional loan, these additional costs must be taken into account as well.
Who is an ideal candidate for an FHA loan?
An FHA loan is a great solution in many cases, including:
- Homebuyers with a low down payment — Saving for a 20% down payment is difficult for a lot of home buyers. For those struggling to save up a large down payment, an FHA loan can be the best way to get a mortgage. FHA loans only require a minimum of 3.5% down payment, although if you have more than that to put down, it won’t a problem.
- Homebuyers with a low credit score — While shopping around for mortgages, it becomes clear that most lenders require a minimum credit score of 620 for approval. This can disqualify a lot of people. FHA loans, on the other hand, have much more lenient credit score requirements. If your credit score is 580 and above, you are likely to get a mortgage with a 3.5% down payment instead.
FHA loan requirements
While FHA loans are much more lenient with eligibility criteria, there are still some key requirements to meet to get approved.
FHA loans will accept a much lower credit score than most lenders will accept for conventional mortgage loans. The actual score approved by your lender will vary, but in some cases, it can be as low as the 500s.
The ideal credit score to have for an FHA loan is a score of at least 580. Having this score or above allows you to take advantage of the 3.5% down payment requirement in many cases. If your score is lower than 580, lenders will treat your application as slightly riskier and require a higher down payment from you instead. This amount may be difficult to come up with, but it’s still considerably less than the 20% down payment you may need with other loan types.
When applying for any kind of loan product, it’s best to keep your overall debt levels as low as possible. For an FHA loan, lenders look for a debt-to-income ratio of no more than 43%. This is to ensure that new home buyers are not borrowing amounts they cannot afford.
The home must be the buyer’s primary residence
To qualify for an FHA loan, the home must be the buyer’s primary residence. This means that an FHA loan cannot be used to purchase homes for rental purposes or second homes.
[ Read: What is an FHA-Approved Condo? ]
Max loan amounts
With FHA loans, there is a maximum loan amount you can borrow. This is called the FHA lending limit.
For 2020, the FHA limits in low-cost areas are:
- Single: $331,760
- Duplex: $424,800
- Tri-plex: $513,450
- Four-plex: $638,100
For high-cost areas, the limits are as follows:
- Single: $765,600
- Duplex: $980,325
- Tri-plex: $1,184,925
- Four-plex: $1,472,550
FHA loans will require you to pay for extra mortgage insurance. This is also referred to as Mortgage Insurance Premium (MIP). While it can vary, most FHA loans require MIP for at least 11 years of the mortgage and sometimes for the life of the loan.
Do FHA loans have lower interest rates?
FHA loans typically have lower interest rates than traditional mortgages, though there isn’t a huge difference between conventional and FHA loan rates currently. That’s because rates across the board are low right now due to the economic hit the country took from the COVID-19 pandemic. Generally, though, FHA rates are often lower than other types of loans.
However, just because the FHA interest rates look better than other types of mortgages doesn’t mean those figures can be taken at face value. Interest rates on any kind of loan product, whether it’s a credit card or a mortgage, can vary depending on several factors.
Factors such as your credit score, down payment, loan-to-value ratio, loan amount and type of home will all play into the lender’s decision of what interest rate to apply to your mortgage.
One other thing to watch out for is the mortgage insurance premium. This is an extra fee added to the cost of your mortgage, which means that if rates are similar between conventional and FHA loans, you will be paying more for your FHA loan due to those extra insurance charges.
Pros and cons of FHA loans
As with any type of mortgage, there are pros and cons to FHA loans.
- FHA loans only need a small down payment — If coming up with a down payment of 20% seems unrealistic, an FHA loan is a great alternative. Most FHA loans require a minimum down payment of just 3.5%, which makes mortgages more accessible to families who are struggling with lower budgets and incomes.
- You don’t need perfect credit history — Most lenders have high expectations when it comes to credit scores and mortgages. This can make things much more difficult for those who have had poor credit in the past. Sometimes it can take years to repair the damage from defaulted credit card payments or bankruptcy. With FHA loans, the rules are a lot more flexible. Rather than a standard 620 credit score, you can generally qualify for an FHA loan with a score of about 580 or so.
- MIP is generally cheaper than PMI — You’re required to pay for extra mortgage insurance on FHA loans no matter what your down payment is. However, unlike with Private Mortgage Insurance, MIP is the same rate regardless of your credit score. PMI is usually higher if you have poor credit which can make it very expensive.
[ Related: Is Now the Right Time to Get a Mortgage? ]
- Higher mortgage costs — Interest rates may be slightly cheaper with an FHA loan, but that’s not the only cost to think about. FHA loans extra mortgage insurance and an upfront mortgage insurance premium of 1.75% of the loan amount. With traditional mortgages, you won’t have to pay for mortgage insurance if you have 20% down payment and you can cancel it once you reach 22% equity in your home.
- Lower loan limits — FHA loan limits may not be high enough depending on how much you want to spend on a home, particularly if you live in a high-cost area. FHA limits are around 65% of an area’s conforming loan limits.
- Mortgage insurance doesn’t always go away — If you take out an FHA loan with the minimum down payment, you will be stuck paying MIP for at least 11 years, and sometimes for the entirety of the loan. The only way to get rid of it is to refinance to a completely different loan type.
FHA mortgage insurance: What makes FHA loans affordable
Hearing that FHA loans require low down payments and don’t require a perfect credit score makes them sound like a no-brainer. But what makes FHA loans so affordable? As lenders are taking a risk by offering mortgages to those with low down payments or poor credit history, there is a cost to pay for this.
This comes in the form of mortgage insurance. All buyers utilizing FHA loans will have to pay for extra mortgage insurance, which comes in two parts.
- The upfront mortgage insurance premium: This is a mortgage insurance premium valued at 1.75% of your base loan amount.
- Annual mortgage insurance premium: This will be from 0.45% to 1.05% of the loan amount each year of your loan term.
You will be able to include your insurance premiums in your loan amount, but this will increase the amount you are borrowing, and therefore your monthly payments.
FHA loans aren’t the only type of mortgage to require mortgage insurance. However, the private mortgage insurance (PMI) attached to conventional mortgages is slightly different. The main difference between them is that FHA MIP cannot be canceled, whereas PMI can be removed from a mortgage once the homeowner has 22% equity in their home. This is a big downside to FHA loans, and the only way around it is to refinance your mortgage to another type later down the line.