Mortgage interest rates are rising, making it increasingly hard for prospective homebuyers. If you’re struggling to save for a home purchase or have a less-than-stellar credit history, an FHA loan could be a good option. Designed for first-time homebuyers, FHA loans are insured by the US Federal Housing Administration and have less strict loan qualifications than conventional loans. But while you can qualify with a lower credit score and a smaller down payment, there are some usual eligibility requirements. Here’s what to know about FHA loans, including how to apply.
Current FHA loan rate trends
FHA loan interest rates tend to follow the same trajectory as other home loan rates, which means they’ve been on the rise. According to data from CNET’s sister site Bankrate, the average FHA rate for a 30-year mortgage was around 7.6% in October. Though, FHA annual percentage rates, or APRs, are higher -- above 8%.
Last spring, when the Federal Reserve began increasing its federal funds rate to tackle inflation, the cost of borrowing became more expensive. FHA loan interest rates have been affected by the Fed’s interest rate hikes and high-inflation environment, along with other macroeconomic factors and market conditions. Until inflation is under control and the central bank begins cutting rates, we can expect home loan rates to remain elevated through the end of this year and into 2024.
What is an FHA loan?
An FHA loan is a government-backed mortgage that’s insured by the Federal Housing Administration. Because of this, lenders are more likely to approve a borrower with a lower credit score or a smaller down payment.
FHA loans are often attractive to first-time homebuyers, especially in today’s housing market. But you don’t need to be a first-time homebuyer to qualify. As long as you haven’t owned a home in the past three years, you’re considered a first-time buyer according to the US Department of Housing and Urban Development. Even if you’ve owned a home in the past, an FHA loan can still be a good option, especially if you have a low credit score or can’t afford to make a sizable down payment. Just keep in mind FHA loans require you to pay mortgage insurance premiums, which includes a one-time upfront fee as well as additional monthly insurance payments, to secure the loan.
If you have excellent credit or can afford a bigger down payment, however, there are many advantages to a conventional loan, which can have a lower interest rate and less burdensome mortgage insurance requirements.
Who qualifies for an FHA loan?
Overall, it’s easier to qualify for an FHA loan than a conventional one. But because the FHA only insures loans by private lenders, you may find that the lender you work with has its own requirements. Here’s a rundown of some of the key requirements:
Credit score: You’ll need a score of 580 or higher if you can make a down payment of 3.5% of the purchase price, or 500 if you can make a 10% down payment. Some lenders will have their own higher credit requirements, often around 620 to 660, for FHA loans.
Debt-to-income ratio: Most lenders require you to have a 43% DTI ratio, but some lenders will accept DTI ratios as high as 50%. To calculate your DTI, divide your monthly debt payments (including student loans, credit cards, auto payments and other loans) by your pretax monthly income.
Proof of income: You’ll need to show proof of employment history as well as pay stubs, tax returns and bank statements to show that you have sufficient income to cover your mortgage payments.
Primary residence: The house you plan to purchase must be a primary residence, not an investment property or second home.
What are the credit and down payment requirements for an FHA loan?
FHA loans are available to borrowers who have scores as low as 500 to 580, whereas conventional loans usually require a minimum of 620. FHA loans require a 3.5% down payment, which is slightly higher than the 3% down payment requirement for a 30-year conventional mortgage.
The amount you’re required to pay for a down payment with an FHA loan will depend on your credit score. You can lock in a 3.5% down payment on an FHA loan as long as you have a credit score of 580 or higher. If your credit score is between 500 and 579, you can still secure an FHA loan, but you’ll have to come up with a 10% down payment.
Do FHA loans have lower interest rates?
Average interest rates for FHA loans look lower than average rates for conventional loans. However, the interest rate doesn’t tell the full story of the loan. Borrowers should look at the annual percentage rate to get a broader measure of the total borrowing cost. The APR includes the interest rate, mortgage points, broker fees and other charges. The APR on FHA loans is often higher than for conventional loans since it factors in the cost of mortgage insurance premiums.
How to get the best FHA rate
- Improve your credit score. Before you apply for an FHA loan, pull your credit report to see how you’ll look to lenders. (Here’s how to get a free one.) The FHA doesn’t require a high credit score to qualify for a loan, but a better credit score (closer to 700) will almost always help you get a lower mortgage rate.
- Lower your debt-to-income ratio. If you can get your DTI ratio below 43%, it will improve your odds of getting a lower interest rate. Paying down high-interest credit card balances can help.
- Consider a shorter loan term. The loan term you choose will also have an impact on the mortgage rate you qualify for. A shorter loan term, like a 15-year FHA loan, can offer you a lower interest rate. But you’ll be on the hook for higher monthly payments than you would with a 30-year fixed FHA loan.
- Shop around for different rates from lenders. Get offers from multiple lenders for the lowest rates and fees. Even though the FHA has standards for lending, banks, credit unions and mortgage companies set their own pricing.
How to apply for an FHA loan
To apply for an FHA loan, here are the basic steps you should follow:
Know your limits: FHA loans cannot exceed a certain loan amount. The limit changes each year, and it varies by county. Use the FHA’s tool to determine the maximum amount you can borrow.
Explore down-payment assistance options: An FHA loan requires at least a 3.5% down payment, which can still amount to a lot of cash. Before you apply, see if you’re eligible for down-payment and closing-cost assistance.
Get preapproved: A preapproval is the first step and will work to your advantage when putting in an offer, signaling to sellers that you are serious.
Compare multiple lenders: You don’t have to get your mortgage through the lender that preapproves your application. Compare at least three offers from different lenders to identify the best deal.
FHA loan fees
FHA loans have fees, including many of the typical ones charged by mortgage lenders. But one of the most expensive fees uniquely associated with FHA loans is the mortgage insurance premium, also called MIP.
You’re required to pay MIP no matter how much you put down on an FHA loan. Typically, it includes an upfront fee when closing on your house in the amount of 1.75% of your loan. You’ll also be on the hook for a monthly premium equivalent to 0.45% to 1.05% of your loan, which will increase your monthly mortgage payment.
If you go with an FHA loan, you’ll have to pay mortgage insurance premiums for a minimum of 11 years. If your down payment is less than 10%, you’ll have to continue paying MIP for the entire duration of the loan. In contrast, with a conventional loan, you can discontinue private mortgage insurance once you’ve built up 20% equity in your home. (Equity is the difference between what you owe on your mortgage and what your home is currently worth.)
Pros and cons of FHA loans
Anytime you’re thinking about borrowing a large amount of money, it’s important to weigh the upsides and downsides. Be sure to consider the pros and cons of FHA loans.
Pros
Lower credit score required: With an FHA loan, you can get a loan with a credit score in the 500s, provided you can afford a 10% down payment. Conventional loans typically require a credit score of 620.
Down-payment assistance options: With FHA loans, there are state and local programs available to borrowers to help cover some mortgage costs.
Lower interest rates: The national average for FHA rates tends to be a bit lower than averages for other home loans, so you may be able to save on interest.
Cons
Mortgage insurance: Mortgage insurance is required on all FHA loans. Those premiums tend to last for the life of the loan (unless you’ve made a down payment of 10% or more, in which case the premiums last 11 years).
Lower loan limits: Loan limits for FHA loans tend to be much lower than with conventional loans.
Strict appraisal requirements: FHA appraisals tend to be tougher than conventional appraisals. FHA appraisers need to verify that the home meets certain health and safety standards. This could disqualify you from purchasing a fixer-upper.
Higher APR: The APR on an FHA loan is typically higher than a conventional loan due to mortgage insurance premiums.
Current mortgage rates
| Product | Interest rate | APR |
|---|---|---|
| 30-year fixed-rate | 7.26% | 7.31% |
| 15-year fixed-rate | 6.70% | 6.78% |
| 30-year fixed-rate jumbo | 7.37% | 7.42% |
| 30-year fixed-rate FHA | 6.92% | 6.97% |
| 5/1 ARM | 6.74% | 7.92% |
| 5/1 ARM jumbo | 6.55% | 7.78% |
| 7/1 ARM | 6.85% | 8.00% |
| 10/1 ARM | 7.11% | 7.87% |
| 15-year fixed-rate jumbo | 6.92% | 7.00% |
| 20-year fixed-rate | 7.08% | 7.14% |
| 30-year fixed-rate VA | 7.07% | 7.12% |
| 7/1 ARM jumbo | 6.67% | 7.78% |
| 15-year fixed-rate refinance | 6.76% | 6.84% |
| 30-year fixed-rate refinance | 7.25% | 7.29% |
| 5/1 ARM refinance | 6.60% | 7.79% |
| 7/1 ARM refinance | 6.75% | 7.87% |
| 10/1 ARM refinance | 7.13% | 7.83% |
| 30-year fixed-rate jumbo refinance | 7.35% | 7.40% |
| 15-year fixed-rate jumbo refinance | 6.98% | 7.06% |
| 5/1 ARM jumbo refinance | 6.46% | 7.76% |
| 30-year fixed-rate FHA refinance | 6.95% | 7.00% |
| 20-year fixed-rate refinance | 7.08% | 7.13% |
| 30-year fixed-rate VA refinance | 6.70% | 6.74% |
| 7/1 ARM jumbo refinance | 6.67% | 7.78% |
We use information collected by Bankrate, which is owned by the same parent company as CNET’s, to track daily mortgage rate trends. The above table summarizes the average rates offered by lenders across the country.
More mortgage tools and resources
You can use CNET’s mortgage calculator to help you determine how much house you can afford. The CNET mortgage calculator factors in variables such as the size of your down payment, home price and interest rate to help you figure out the amount of a mortgage within your financial means. Using the CNET mortgage calculator can also help you understand how much of a difference even a slight increase in rates makes in how much interest you’ll pay over the life of your loan.
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