When exploring home loan options, FHA loans often stand out—especially for first-time buyers or those with limited credit histories.
This popular loan option offers:
- Lower down payments
- Flexible credit score requirements
- Government-backed security
However, a key element to consider before applying is FHA loan rates.
In this guide, we’ll look at FHA loan rates, the factors that influence them, and what you can do to help secure the best rate possible.
Apply for an FHA loan today with Lendistry Home Loans.
What is an FHA loan?
An FHA loan is a home loan backed by the Federal Housing Administration (FHA) with flexible lending requirements, helping those who may have trouble qualifying for a conventional loan to access home financing.
FHA loans aim to help borrowers with limited savings or lower credit scores, which make it challenging to qualify for conventional mortgages.
The FHA reduces lender risk by insuring these loans, and lenders can pass on that reduced risk to potential homeowners through more favorable terms to potential homeowners.
FHA loans vs. conventional loans
While FHA loans are a great option for many buyers, it’s essential to compare them to conventional loans to determine which is the better fit for your financial situation.
- Credit Score: Conventional loans generally require higher credit scores than FHA loans.
- Down Payment: Conventional loans typically require larger down payments, especially for borrowers with lower credit scores.
- Mortgage Insurance: Private mortgage insurance (PMI) is mandatory for conventional loans with down payments of less than 20%. A mortgage Insurance Premium (MIP) is required both upfront and annually with FHA loans, regardless of the down payment.
- Property Types: Conventional loans may offer more flexibility regarding property types. FHA appraisals prioritize safety and soundness, which could lead to property limitations, while conventional appraisals focus more on value.
- Interest Rates: FHA loan rates can sometimes be lower than conventional rates, but your financial profile ultimately determines the final rate.
FHA loan rates explained
There are several factors that can impact the FHA loan rate you might qualify for, including:
- Current market conditions
- The terms of your loan
In many cases, FHA loan rates are more affordable than those of conventional loans, especially for borrowers with lower credit scores. As of 2024, FHA loan rates range between 5% and 7%.
While these rates are generally lower than conventional loans, they can fluctuate due to factors like inflation and Federal Reserve policies.
How interest rate fluctuations affect your mortgage payment
Even small changes in FHA loan rates can impact your monthly mortgage payment and the total interest paid over the life of the loan.
For example, a 0.25% increase in interest rates on a $250,000 loan can raise your monthly payment by roughly $40–$50—and thousands of dollars over the loan term.
Understanding how interest rates fluctuate with economic conditions can help you better time your loan application and potentially save a substantial amount of money in the long run.
Factors that influence FHA loan rates
Let’s look at some of the factors that can influence your FHA loan rate in more detail.
Market conditions
The broader economic climate significantly impacts FHA loan rates. Factors such as inflation, employment levels, and Federal Reserve interest rate decisions all play a role.
If the Federal Reserve raises rates to manage inflation, FHA loan rates may increase. Alternately, during periods of economic uncertainty, rates may drop to stimulate borrowing.
Credit score
Your credit score significantly influences the interest rate you receive for your FHA loan.
Although FHA loans are more lenient regarding credit scores, a higher score usually results in a lower rate.
Borrowers with scores above 700 can typically access the most competitive rates, while those with scores below 600 may face slightly higher rates.
Loan term
FHA loans come with various term lengths, typically ranging from 15 to 30 years.
Lower interest rates typically accompany shorter loan terms—but they have higher monthly payments.
A 30-year FHA loan usually offers higher rates but with lower monthly payments, which can be advantageous for those seeking to manage cash flow.
Down payment
The FHA allows for low down payments, with a minimum requirement of 3.5% for borrowers with credit scores of 580 or higher.
However, offering a larger down payment can reduce your interest rate. By borrowing less, you minimize the lender’s risk, which often leads to better loan terms.
Location and property type
Where you buy your home can influence your FHA loan rate. Properties in areas with higher living costs may come with higher rates.
Additionally, the type of property—whether it’s a single-family home, condo, or duplex—can also affect your rate.
For example, FHA loan rates for condominiums may differ slightly from those for single-family homes.
Debt-to-income ratio
Your debt-to-income (DTI) ratio looks at your monthly debt payments to your monthly income and impacts your FHA loan rate.
A lower DTI signals to lenders that you have the financial capacity to manage a mortgage, potentially securing a lower rate.
While FHA loans allow for higher DTI ratios than conventional loans, keeping it below 43% is recommended to improve your chances of securing favorable terms.
How to get the best FHA loan rates
While you can’t control what the market does, a few strategies can help you secure the best FHA loan rate possible:
- Improve your credit score: Focus on paying down debts and making on-time payments.
- Increase your down payment: If possible, contribute more than the minimum down payment to reduce your borrowing costs.
- Shop around: Consider rates from multiple lenders, as FHA loan rates can vary.
- Choose the right loan term: Shorter terms usually have lower rates, though they come with higher monthly payments.
Lendistry Home Loans offers competitive FHA loan rates
Securing a competitive FHA loan rate is a crucial step toward affordable homeownership.
By understanding the factors that affect FHA loan rates and making informed choices, you can position yourself for success.
Ready to take the next step? Explore your FHA loan options with Lendistry Home Loans.
Our team is here to guide you through the process and help you select the best loan and rate situation possible.
