Compare FHA Loan Rates | U.S. News

U.S. News Expert Insights

“Mortgage rates retreated further this week as incoming data on inflation and the labor market continues to point to a cooling economy. In its December meeting, the Federal Reserve elected to hold the federal funds rate at 5.25% to 5.5%, where it’s been since July. It appears that the Fed’s rate-hike cycle has likely come to an end, so now investors have turned their attention to when rate cuts might come next year.

“Although mortgage rates seem to have peaked, prospective homebuyers should still temper their expectations. The rate on a 30-year fixed mortgage isn’t likely to return to record-low territory anytime soon, if ever again: Most forecasters believe that rates will stay above 6% throughout 2024. As long as the economy keeps humming along at a steady pace, rates will stay elevated. But considering that rates were nearly 8% just over a month ago, it’s evident that housing affordability is on the right track.”

– Erika Giovanetti, U.S. News Loans Expert

One of the benefits of FHA loans is that they typically have more lenient qualification standards than conventional loans. You will still need to meet certain requirements, but these tend to be more flexible.

This is possible since these loans are backed by the FHA, taking some of the risk off of lenders. If the homeowner defaults on their mortgage payment, the FHA will step in to cover the unpaid principal on the loan.

“Most FHA-approved lenders require a minimum credit score of 580,” says Anna DeSimone, author of “Housing Finance 2020,” a silver medalist in the 2020 Axiom Business Book Awards, and its Spanish-language edition, “Hipoteca 2020.”

“However, FHA will insure loans with borrowers who have a credit score as low as 500, or have had collection accounts or judgments,” DeSimone adds.

If you do have judgments or loans in collections, you will need to provide a written letter explaining the circumstances. You’ll also need to make a higher down payment – at least 10% – if your credit score is below 580. With a higher score, the minimum down payment is just 3.5%.

Even if you have no credit score, it’s possible to get a loan through an FHA lender, DeSimone says. In this case, the lender can consider a non-traditional mortgage credit report, which can include proof of timely payments for rent, household bills, including your cable TV and electricity, and more.

That said, the lowest average borrower credit score for FHA loans on new home purchases between fiscal years 2016 and 2022 was 666, according to data from HUD, with averages measured in three-month increments.

In addition to credit score requirements, the FHA considers your debt-to-income ratio, or DTI, or the ratio of your total monthly debts to your gross monthly income. In general, your DTI cannot exceed 43%, meaning your total obligations, including your mortgage, are no more than 43% of your total gross income.

However, if your credit score is 580 or higher, the DTI may be stretched based on certain criteria, such as whether you’re purchasing an energy-efficient home, have large cash reserves or no debt outside of your house payment, or your new home purchase would represent a minimal increase in your overall housing payment. Depending on the situation, it’s possible to get a loan with a DTI as high as 50%.

FHA lenders also look at your mortgage payment ratio, which is the ratio of your mortgage payment to your gross income. It’s generally capped at 31%, although borrowers purchasing energy-efficient homes may be allowed to stretch the ratio to 33%.

To improve your chances of qualifying for an FHA loan, Livengood recommends taking the following steps:

Before applying for an FHA loan, take time to determine how much you can afford using tools such as mortgage calculators. Factors including your income, credit rating, current expenses and down payment can affect your interest rate and the loan’s affordability. With this information in mind, it’ll be easier to shop for lenders that meet your needs.

You can find an FHA lender in your area using HUD’s search tool. Be sure to get information from several lenders so you can shop for the best offer. Even if one lender disqualifies you based on your credit score or another factor, another may be willing to work with you, especially if you have other mitigating circumstances.

Your chosen lender will walk you through the application process. Be prepared to provide documents including:

As mentioned, the FHA insures mortgage loans, protecting lenders against loss and enabling them to extend loans to more borrowers. “FHA loans are issued by FHA-approved lenders but are backed by the federal government, which helps protect the lender from potential financial risk,” Livengood says.

The FHA also requires borrowers to pay a mortgage insurance premium that helps protect the lender against losses. On most FHA loans, this is a charge of 1.75% of your loan amount, paid at closing or rolled into your loan, plus an annual premium. If you made a down payment of at least 10%, you can eliminate this payment after 11 years.

It’s possible to get an FHA loan with a down payment as low as 3.5%. With a credit score between 500 and 579, however, you’ll need to make a down payment of at least 10%. Keep in mind that you can use gift funds for your down payment.