FHA Mortgage Rates: What Makes Them Move & How To Get Lower

December 7, 2020

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10
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A neighborhood of large homes with a view from above.

Learn how to get a low rate on an FHA loan.

If you want to buy a house with a lower down payment, the Federal Housing Administration (FHA) might offer exactly what you need. Like other mortgage loan products, FHA mortgage rates fluctuate with the economy and are specific to your circumstances. While you don’t have much control over the economy, there are steps you can take to lower your rate—and a lower rate means lower payments and significant savings over the life of your loan.

Quick Plan

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Rates fluctuate with the economy. Get to know the trends.

It's smart to look at where rates are going, but waiting for the perfect rate may not pay off.

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See where you can improve your credit score or lower your debts.

A better score can qualify you for better loan programs. Your loan advisor can help.

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Bring more money to the closing table.

A higher down payment can help you get a lower rate.

How Does an FHA Mortgage Work?

An FHA loan is different from a conventional mortgage because the Federal Housing Administration insures it. The insurance protects the lender from losses if the borrower defaults on the loan. That lowers risk, which is why lenders are willing to accept lower down payments and lower credit scores for these loans.

A conventional mortgage requires 20% down to avoid paying mortgage insurance.

FHA loans will accept a down payment as low as 3.5%. For a $150,000 home, that’s $5,250 instead of $30,000, which is much more accessible for the average home buyer.  

Conventional mortgage loans usually require a credit score of at least 620, but you can qualify for an FHA loan with a score of 579 or even lower. If your score is between 500 and 580, you can still get an FHA mortgage, but you’ll need to make a 10% down payment.  

You can qualify for an FHA loan with a score of 580 or even lower.

What Makes FHA Mortgage Rates Move?

FHA mortgage rates are typically a bit lower than conventional home loans because of the lower risk. But there are a lot of factors that impact the rate you’ll be offered. It’s a good idea to understand what those factors are so you can create a strategy to find the lowest rate possible.

How much of a difference does the rate make? On a $200,000 home, a 1% difference in the interest rate can increase your monthly payment by nearly $100. Over 30 years, that higher rate would cost you about $30,000 in additional interest.

Your financial situation and by the market influences the rate you’ll pay.

Market Factors That Influence FHA Mortgage Rates

You’re probably aware that interest rates rise and fall over time. But do you know the factors that determine the rates and how to watch for changes?

The Federal Reserve Bank—the Fed—sets the tone for interest rates, depending on what they feel will benefit the economy overall. By law, banks are free to set their own rates within certain limits. But the Fed creates incentives that can push interest rates higher or lower.

Generally, when the economy is strong, the Fed will raise rates to encourage people to save. It lowers rates when the economy is sluggish to get people spending again.

In a strong economy, you can expect rates to go up. If the economy isn’t good, watch for rates to go down.  

The ten-year Treasury bond yield is considered the best indicator as to whether FHA rates will go up or down this week. That’s because most homeowners tend to either pay off or refinance their homes in about ten years, even if they’ve taken out a 30-year mortgage.  

If you’re ready to apply for your mortgage and you’re not sure whether you should hurry or wait a few days, look at the Treasury bond yield. If it’s rising this week, you should probably lock in your rate as quickly as possible. If it’s falling, you might want to wait a few days to see if mortgage rates come down as well.

That’s how rates move overall, but there are specific factors that will influence the rate you’re offered. You have a little more control over those.  

Personal Factors That Influence FHA Mortgage Rates

Your credit score is a major factor that influences the programs you qualify for, and your rate. If you have a history of handling debts well and making payments on time, you’ll have a higher credit score and qualify for better programs and potentially a lower rate. But if you’ve shown a pattern of late payments, missed payments, and financial issues, you’ll be considered high risk.

Your debt-to-income ratio is another factor. Most lenders look for monthly debt payments, including your new house payment, to be less than 57% of your income. The lower your monthly debt payments are, the lower your mortgage rate will be.  

The size of your down payment can impact your interest rate, too. Lenders like to see a large down payment because it means you’ve successfully saved a good deal of money, and you’re willing to put it on the line. The smaller your down payment, the riskier the deal looks from the lender’s point of view.

The FHA guarantee lets you buy a house with a 3.5% down payment, but you may pay a higher rate than you would with a higher down payment amount.

Another factor that can impact your rate is the size of your loan. Loan amounts that are larger than average can carry higher rates.

Your choice of mortgage loan product will also impact your FHA mortgage rate. Borrowers who opt for an adjustable-rate mortgage will always start at a lower rate. However, that rate can climb over the years that you’re in your home. If you’re buying a home while rates are very low, you might want to lock those in with a fixed-rate mortgage, even if the rates are slightly higher than you’d get with an adjustable-rate mortgage.

One other factor that can modify your FHA mortgage rate is discount points, which are a form of prepaid interest. Every point equals 1% of the amount you’re borrowing. If you choose to pay points up front, you can get a lower rate, which can save you a lot of money if you’ll be in the house for a long time.  

Property Factors That Influence FHA Mortgage Rates

FHA loans are meant for owner-occupied properties, not investment real estate. However, FHA loans are available for different property types, including single-family houses, condominiums, manufactured homes, and multi-family properties with up to four units.  Some lenders charge more for multi-family properties, condominiums, and manufactured homes. Usually, the lowest rates are available to people buying standard detached single-family homes.

Your rate will be influenced by your financial situation and the market.

How to Get Lower FHA Mortgage Rates

Here are the essential steps you need to take if you want the lowest rate possible.  

Check Your Credit Report

One of the first steps you'll take with your Lower loan advisor is to walk through your credit report. (Only a soft credit pull to get started.) If you find any errors that might impact your score, you can open a dispute with the reporting agency, and get those issues corrected.  

Lower Your Monthly Debt Obligations

If your debt-to-income ratio is close to 57%, reducing your payments will help you get a lower rate. Talk to your creditors and ask if there’s any way to reduce your monthly payments. You may be surprised to learn about the options they can offer. If you can manage it, paying off a credit card can help a lot, too. These are all things you can discuss with your loan advisor.

Consider a Larger Down Payment

If you have enough cash to make a larger down payment and still keep an emergency fund, it might be a wise decision. Ask your mortgage provider how the rate would change if you put more money down, and use a mortgage calculator to see what impact the lower rate has on your monthly payment and total interest cost.

The Bottom Line

While you can't control where mortgage rates go, you can get a lower rate by improving your credit score, paying off debt, and/or bringing more money to the closing table. The first step is to chat with a Lower loan advisor—we're here to help you get started.

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