FHA Loan Rates

If you have a low income or a below-average credit score, you may have assumed that you can’t qualify for a mortgage loan. However, FHA loans backed by the Federal Housing Administration exist for this very purpose.

The FHA provides a loan guarantee to private lenders, so these companies can lend to first-time homebuyers who don’t meet traditional eligibility requirements. FHA interest rates are often lower than what borrowers with the same credit and income profile would receive on a conventional loan.

FHA loan rates still do vary from one lender to another, though. This guide will explain how to find the best FHA mortgage rates so you can get a loan that’s as affordable as possible.

In this guide:

• Average Mortgage Rate
• Mortgage Rates Over Time
• Are FHA Loan Rates Really Lower Than Conventional Loan Rates?
• How do I Find the Best FHA Mortgage Rates?
• Types of FHA Mortgage Rates

Average Mortgage Rate

Although national indexes don’t track the average FHA loan rate, they do track the average rate on 30-year fixed-rate mortgages. This average rate provides a good benchmark for you to compare against the rates you’re offered by FHA-approved mortgage lenders.

Average 30-year fixed-rate mortgage	As of
3.58%	9/05/2019

Source: Freddie Mac

Mortgage Rates Over Time

Mortgage rates do not stay the same over time. Here is how rates have changed in recent years.

Are FHA Loan Rates Really Lower Than Conventional Loan Rates?

Average FHA loan rates aren’t necessarily lower than average conventional rates. However, the rate you receive will typically be lower than the rate you’d receive if you got a conventional loan under the same terms. This is especially true if you have a lower credit score and a low down payment.

Lenders can afford to offer FHA loans at a lower rate because the government helps ensure they don’t face substantial losses if a borrower defaults. This reduced rate can make a big impact for borrowers.

However, because FHA loans have lower down payment requirements (typically 3.5%), your monthly mortgage payments might not be lower than they’d be on a conventional loan. If you qualify for an FHA loan with a 3.5% down payment, you may have to borrow more and face higher payments.

The table below shows how a conventional and FHA loan might look like if you wanted to buy a $300,000 house.

	FHA Loan	Conventional Loan
Down payment	3.5%	20%
Amount borrowed	$289,500	$240,000
Interest rate	4.5%	4.875%
Monthly mortgage principal and interest	$1,467	$1,270
Private Mortgage Insurance/PMI	$205	$0

Because you put 20% down on the conventional loan in this example, you do not have to pay for PMI. However, you do have to pay for FHA mortgage insurance equal to 0.85% of the loan value for your FHA loan, and you’re required to pay this for the life of the loan if you put down less than 10%.

You are also required to pay an upfront fee for mortgage insurance when you take out an FHA loan, which you don’t have to pay on a conventional loan even if you put down less than 20%.

As you can see, costs are higher for the FHA loan even with the lower rate—but you can get the home with a much smaller down payment.

How Do I Find the Best FHA Mortgage Rates?

There are many factors that affect your interest rates. Here are a few ways you can obtain better rates to find the best FHA mortgage lender.

Improve Your Credit Score

You don’t need a good credit score to get an FHA loan. In fact, you can qualify with a score as low as 500 with a 10% down payment or as low as 580 with a 3.5% down payment (although this may vary by lender).

However, you can still lower your rates with many lenders by improving your credit score.

You can raise your credit score by being a responsible borrower. Pay all your bills on time, keep your credit utilization ratio below 30%, and avoid opening multiple new credit accounts or loans all at one time.

Increase Your Down Payment Amount

Many people are attracted to FHA loans because they require such low down payments. But a larger down payment could help you qualify for a better rate and also reduce the risk of ending up owing more than your house is worth if its real estate value declines.

A higher down payment could also help you to avoid being stuck with lifetime mortgage insurance, which is based on the size of your down payment and your loan amount, and which can add thousands to the cost of your loan.

Shorten Your Loan Term

Mortgage loans have different term lengths. Thirty-year terms are the most common, but 15- and 10-year terms are often also available. A shorter loan term can result in a lower interest rate, since lenders know they’ll get their money back sooner.

However, while a shorter loan term can reduce your rate, it can also make your monthly payments much more expensive, since you’re paying off what you owe in far less time.

Our mortgage calculator can help you determine how different loan terms and interest rates will impact your monthly costs.

Improve Your debt-to-Income Ratio

FHA loans generally also have more relaxed requirements when it comes to your debt-to-income ratio. But that doesn’t mean that a lower DTI won’t still impact your rates.

Your DTI is calculated by determining your total debt payments each month and comparing them to your gross income. The lower your DTI, the less risk you pose to lenders, so work on reducing your debt or increasing your income before you apply for an FHA loan.

Compare Quotes

Remember, different lenders offering FHA loans have different rates and terms, even though each of these loans is backed by the government. Because of this, it’s important to compare quotes from a few of the best mortgage lenders.

You might also want to apply for a mortgage from a bank or credit union that you already do business with. Your ongoing relationship with the financial institution enables them to see your payment history, so they may be more likely to approve you for a loan at a better rate.

Refinance Your Existing Loan

If you have an FHA loan already and you have improved your credit score, debt-to-income ratio, or other aspects of your finances since you obtained the loan, refinancing may help you reduce your current rate.

You can refinance your mortgage into another FHA loan, so you’re able to keep the government guarantee.

Types of FHA Mortgage Rates

FHA loan rates can take one of several shapes. The type of FHA loan rate you elect will have a big impact on your monthly payments.

Fixed-Rate FHA Loans

A fixed-rate FHA loan is a loan with a set interest rate that never changes during the loan payback period. Since your rate stays the same, your payment does too, and you don’t need to worry about rising costs.

30-Year Fixed-Rate Mortgages

A 30-year fixed-rate mortgage is a very popular type of home loan. This loan gives you three decades to pay off your mortgage in full, and each payment stays the same for the entire life of the loan because of the fixed rate. These loans are affordable because of the long repayment timeline and present little risk to the borrower because rates don’t change.

>> Read More: 30-Year Mortgage Rates

15-Year Fixed-Rate Mortgages

A shorter mortgage term comes with lower interest rates in most cases, but also much higher monthly payments due to the shortened repayment timeline. If you can afford the payments and you want to be mortgage-free in half the time, consider a 15-year mortgage term.

>> Read More: 15-Year Mortgage Rates

10-Year Fixed-Rate Mortgages

When you get a 10-year mortgage, you have even less time to pay off your loan. But this can also translate to lower interest costs. These loans aren’t often affordable, but if you can make the monthly payments, you’ll pay less on interest and own your home free-and-clear in just one decade.

>> Read More: 10-Year Mortgage Rates

Adjustable-Rate FHA Mortgages

When you choose an adjustable-rate loan, you give up the security of knowing your total interest costs upfront because your interest rate and payment could change. But you do generally secure a lower starting interest rate than you’d receive on a fixed-rate mortgage. This can make monthly payments cheaper and easier to qualify for initially.

3/1 ARM

A 3/1 ARM has the shortest fixed-rate period of all adjustable-rate loans. The “3” stands for the number of years that your initial rate will be fixed. After that, it can change once annually. If you want a low monthly payment and think you may sell or refinance quickly, this can be a good option.

5/1 ARM

A 5/1 ARM gives you two more years to enjoy your initial rate than with the 3/1 ARM. You get a slightly higher rate, but don’t have to worry about it changing as soon. This can make a 5/1 ARM a good option if you’ll be staying put a little longer but likely selling or refinancing within five years.

7/1 ARM

A 7/1 ARM comes with slightly higher rates than its shorter counterparts in most cases, but you have seven full years before you have to worry about your rate changing. This provides a long time before you have to face the potential for a higher monthly payment, and you won’t have to worry about that if you plan to sell or refinance during that time.

Pros & Cons of FHA Loan Rates

You should carefully consider both the advantages and disadvantages of securing an FHA loan.