How to Get the Lowest FHA Interest Rate Today
Many home buyers are laser focused on finding the lowest FHA interest rate when they are shopping for a mortgage. In many instances, the published rates online or in a newspaper ad are either expired or they apply to a small subset of borrowers. There are so many factors that go into an FHA rate quote that there is no way for FHA lenders to publish rates that would apply to each borrower.
The best way to get the lowest FHA interest rate today is to first understand how the rates are determined, focus on what you can control as a borrower, and work with the lender to find creative ways to lower the rate.
How are FHA Interest Rates Determined?
We often get calls from home buyers or people looking to refinance and they often ask “what is my rate?” before sharing any information related to their scenario. There are so many factors that help determine the interest rate for each borrower. This is why the interest rate offered for you may be much different than the rate offered to someone else, or the rate you see published online.
Below are some of the various factors which play a major role in determining the interest rates offered. In the image down below, you can see an example of some pricing adjustments from just one lender that will impact the FHA interest rate. Keep these in mind when you are shopping to get the lowest FHA interest rate.
Credit Score – Credit scores have the largest impact on the interest rate a lender can offer. Unfortunately, many people do not manage their credit properly and find out the realities of its impact on rates when they start shopping for a mortgage. A lender can provide you with an initial rate quote but when they actually pull your credit report and the scores are lower, the rate will be impacted.
Down Payment – For FHA loans, the down payment will be the same unless your credit score is below 580. So, down payment amount or loan to value ratio for FHA loans are not as critical when it comes to determining your interest rate. However, for conventional loans, it does play a major role. Keep that in mind if you are comparing FHA vs Conventional rates.
Debt to Income Ratio – The FHA debt to income ratio should be no more than 43%. However, some lenders will allow for DTI as high as 60%. If your DTI is high, there may be an upward rate adjustment.
Loan Amount – Lenders also build in rate adjustments depending upon the loan amount. The lower the loan amount, the high the rate in some instances. In the example below, you can see that adjustments are made as the loan amount dips below $200k.
Number of Units – If you are considering a multi-family building to purchase as your primary residence, you are potentially making a very wise decision. Living in a multi-family building while renting out the other units is a great way to build wealth. However, there will likely be a small rate adjustment.
Type of Home – In some instances, financing a condo with an FHA loan may result in a small rate increase. However, when it comes to mobile homes and manufactured homes, most lenders will add a premium to the rate.
Type of FHA Loan – You will find the rates will be different when comparing the various types of FHA loans. A standard FHA purchase may have one interest rate while an FHA streamline refinance, FHA 203k rehab loan, and the FHA one time close construction loan all may have different rates.
Escrows for Taxes and Insurance – When you purchase a home, you have a choice to include your taxes and insurance in your mortgage payment versus paying them directly to your town and insurance company. In that situation, your lender will make those payments for you and will need to collect an escrow to cover those costs at closing. If you choose NOT to escrow for taxes and insurance, there may be a small rate add on.
Geographic Location – There are certain states that lenders consider to be high risk. From the lender’s perspective, that risk is tied to the potential for a significant decline in real estate values. Not all lenders have geographic rate adjustments but some do. This is something to inquire about when speaking to an FHA lender.
The final factor which is hard to measure is whether the FHA lender wants to be competitive. In some instances, lenders will target a specific profit margin for their loans and in turn will bump up the rates slightly to make sure they are earning what they need. That said, most lenders prefer to provide competitive FHA rates because the profit margin for them is higher than conventional loans.
Focus on the FHA APR Offered By the Lender
When you are rate shopping, you should really focus on the APR (annual percentage rate). This factors in the cost of financing (fees) into the total interest paid over the life of the loan. For FHA loans, the spread between the rate offered and the APR is a lot wider than for conventional loans because FHA loans typically have higher fees and costs.
If you plan to stay in the home for just a few years, then the APR will likely matter much more than the actual interest rate offered.
How to Get the Lowest FHA Interest Rate
There are two things you can do as a borrower to get a lower FHA interest rate. Smart rate shoppers will focus on two factors which will give you the best chance at getting the best possible rate. If you just did these two things, you will get a low rate.
1.Improve Your Credit Score
I know we mentioned it before but it warrants repeating. Your credit score is the number one factor when trying to get a lower FHA interest rate. Begin by pulling your own credit report from one of many free online sources such as Credit Karma. Make sure you are getting the full three agency (Equifax, Transunion, and Experian) report so you can see what all three agencies are reporting.
Work with your lender to see what needs to be repaired, paid off, or improved upon to increase your credit scores. Be sure to make on time payments and do your best to keep your balances down. This also means you should not get into a new car loan months before applying for a mortgage. That could also impact your DTI.
Your goal should be a middle credit score of at least 720 to get the best possible FHA interest rate.
2.FHA Interest Rate Buy Down
A great way to reduce your FHA interest rate is to buy the rate down. This is when you pay points to the lender in exchange for a lower rate. A point is one percent of the loan amount. For the lender to offer you a rate much lower than what their rate sheet indicates, they will have to sacrifice commissions on their end. To make up for that lost income, they will charge points.
Paying points is not a bad thing and it can be a great way to save money long term. You need to understand the cost of the rate buy down, figure how much you will save each month with the lower interest rate, and how long it will take before you break even.
One of the benefits of financing with an FHA loan is they will permit the seller contributions towards your closing costs. These contributions are called seller concessions. During the negotiation of the sale price, you can ask the seller to cover your closing costs including discount points from the lender. This means the seller is helping to pay for your lower interest rate.
Which Lender has the Best FHA Rates?
Lenders change their rates often and sometimes more than once each day. They may also change their approach to how they price FHA interest rates over time and decide they want to be more or less competitive.
The best FHA lenders will offer competitive rates and will allow for credit scores as low as 500. They will also accept higher DTI if needed and will finance rehab and construction projects. These lenders are serious about financing properties with FHA loans and will likely have the most competitive rates.
Due to the many factors that determine a lender’s FHA interest rate, it is very difficult to list the ones with the lowest rates here without continuously revising the list. We work with some of the best FHA lenders in our network and based upon your specific scenario, we can help find the lowest rate possible for you.
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Related FHA Articles
FHA Pre-Approval – Find out what it will take to get pre-approved for an FHA loan. Then, we can help you for that approval quickly.
FHA Credit Requirements – See what the basic credit score requirements are for an FHA loan and how they can impact your interest rate.
Bad Credit FHA Loans – You can still get an FHA loan even if you have bad credit. Find out how bad your credit can be to qualify next steps to get approved.
How to Get an FHA Loan with No Money Down – There are creative ways to get an FHA loan with no out of pocket funds.