An FHA loan is a type of mortgage insured by the Federal Housing Administration (FHA). It allows borrowers with low credit scores to buy a home with a down payment as low as 3.5%. FHA loan guidelines are more lenient than conventional loans, giving borrowers with less-than-stellar credit profiles and little cash saved for a down payment a shot at homeownership.
Shop around. Your best bet for getting the lowest FHA interest rates is to compare the loan estimates of at least three to five different FHA-approved lenders. Compare each lender’s closing costs, too. A lower rate with high costs may not be the best deal if you don’t have the extra cash to cover the fees.
Boost your credit scores. The higher your credit score, the lower your FHA interest rate will be. You can improve your credit score by paying bills on time and capping monthly credit charges to 30% of your account limits.
Ask the seller to buy discount points. One full discount point equals 1% of your loan amount, and paying points typically buys you a lower interest rate. You can ask the seller to pay up to 6% of the price of your home toward closing costs, including discount points, to get a lower FHA interest rate.
FHA interest rates are typically lower than a comparable conventional loan. However, recent data suggest a higher share of FHA borrowers are seeking coronavirus mortgage relief, leading lenders to shy away from riskier FHA loans. As a result, FHA interest rates may be higher than conventional rates and qualifying standards may be more stringent.
The graphic below compares conventional and FHA weekly rates since the beginning of 2020, and reflects the recent spike in FHA interest rates.
An annual percentage rate (APR) reflects other costs related to getting a mortgage, such as origination fees and discount points. However, the APR on FHA loans is often much higher than FHA interest rates because of the higher cost of FHA mortgage insurance.
FHA loans require two types of mortgage insurance to protect lenders against default. The first is an upfront mortgage insurance premium (UFMIP) paid in a one-time lump sum. The second is the mortgage insurance premium (MIP), an ongoing annual charge that becomes part of your monthly payment.