An FHA loan is a home loan insured by the Federal Housing Administration designed for first-time homebuyers. With more flexible rates and requirements than a conventional loan, an FHA loan can be a compelling alternative for a prospective buyer with less money for a down payment or a lower credit score. There are some unusual eligibility requirements, however. Here’s everything you need to know about FHA loans, including who qualifies for one and how to apply.
Current FHA loan rate trends
FHA interest rates generally follow the same trajectory as other loan rates, which means they’ve been increasing. According to data from CNET’s sister site Bankrate, the average FHA rate for a 30-year mortgage was just under 7% in mid-December. We expect rates to remain in that range for the time being as the Fed signals that more rate hikes are on the way, though some experts suggest that rates may begin to ease during the second half of 2023.
What is an FHA loan?
An FHA loan is a home loan insured by the Federal Housing Administration. These types of loans may be especially attractive to first-time homebuyers, who snapped up 84% of them in 2021. Even if you have owned a home in the past, however, an FHA loan can still be a good option -- especially if you have a low credit score or can’t afford to make a sizable down payment. If you do have a strong credit score or can afford a hefty down payment, it may be more advantageous to go with a conventional loan, which may have a lower interest rate and less onerous private mortgage insurance requirements.
Who qualifies for an FHA loan?
Overall, it’s easier to qualify for an FHA loan than a conventional one. Here’s a rundown of some of the key requirements:
- Credit score: You’ll need at least a score of 580 if you can make a down payment of 3.5% of the purchase price, or 500 if you can make a 10% down payment.
- Debt-to-income ratio: Most lenders require you to have a 43% ratio -- but some lenders will accept up to 50%. To calculate your DTI, divide your monthly debt payments (including student loans, credit cards, auto payments and other loans) by your monthly income. If you pay $1,000 per month to service your debt and make $4,000 in monthly income, for example, your DTI would be 25% ($1,000 divided by $4,000).
- Proof of income: You’ll need to show proof of employment history as well as pay stubs, tax returns and bank statements to show that you have sufficient income to cover your mortgage payments.
- Primary residence: FHA loans are for owner-occupied buildings, so you won’t be able to finance a second home or a standalone investment property.
How to get the best FHA rate
Before you apply, pull your credit report to see how you’ll look to lenders. (Here’s how to get a free one.) They’ll want to see a lower debt-to-income ratio, so it’s a good strategy to pay down high-interest credit card balances. Paying off debt will also shrink your credit utilization ratio and improve your credit score.
Another tactic is to shift federal student loans to an extended or income-driven repayment plan in order to reduce your monthly loan payments, according to Mark Kantrowitz, an expert on student financial aid and loans. “In recent years, the FHA standard for DTI has changed. FHA uses the greater of 1% of the outstanding balance on the loan or the actual documented payment. If the actual documented payment is less than 1% of the outstanding balance, the FHA allows using the lower payment only if it will fully repay the loan over its repayment term.”
It’s also important to compare offers from multiple lenders to see which offers the combination of the lowest rate and fees. While the FHA sets lending standards, banks, credit unions and mortgage companies set their own pricing. As such, it’s best to compare at least three offers to identify the best deal.
You may also consider a 15-year FHA loan. If you can afford the higher payments, you’re sure to get a lower interest rate.
How to apply for an FHA loan
The FHA doesn’t actually lend money; rather, it insures the mortgages approved by private lenders, which then protects lenders if a borrower defaults. Here’s a rundown of how to get your FHA application ready.
1. Know your limits: FHA loans cannot exceed a certain amount. The limit changes each year, and it varies by county. Use the FHA’s tool to determine the maximum amount you can borrow.
2. Explore down-payment assistance options: While a 3.5% down payment amount may sound modest, it can still amount to a lot of cash. Before you apply for an FHA loan, see if you’re eligible for down-payment and closing-cost assistance. If you qualify as a low- to moderate-income borrower, based on your area’s median income, you may receive assistance.
3. Get preapproved: A preapproval is the first step toward getting approved and will give you an advantage when putting in an offer, sending a signal to sellers that you are serious.
4. Compare multiple lenders: You don’t have to get your mortgage through the lender that preapproves your application. Instead, it’s smart to look at at least three lenders to see if one can give you a better deal in terms of a lower rate or lower fees.
FHA loan fees
FHA loans do have fees, including many of the typical ones mortgage lenders charge. But one of the most expensive fees to keep in mind with FHA loans is the required Mortgage Insurance Premium, which will increase your monthly payment.
You will be required to pay MIP no matter how much you put down on an FHA loan; typically, it will include an upfront fee when closing on your house in the amount of 1.75% of your loan. You will also be on the hook for a monthly premium equivalent to 0.45% to 1.05% of your loan, depending on the size of your down payment. So, with a $500,000 loan, that could mean an $8,750 upfront fee.
It’s important to note that while you can discontinue private mortgage insurance on a conventional loan once you’ve built up 20% equity in your home, you may not be able to stop paying for MIP regardless of your equity. (Equity is the difference between what you owe on your mortgage and what your home is currently worth.) You can only get rid of MIP on an FHA loan if your down payment was 10% or higher, and even then, only after 11 years.
Anytime you’re thinking about borrowing a large amount of money, it’s important to weigh the upsides and downsides. Be sure to consider these major pros and cons of FHA loans.
Pros
Lower credit score required: With an FHA loan, you can get a loan with a credit score in the 500s -- if you can afford a 10% down payment. A credit score of 580 or above will require a 3.5% minimum down payment. Conventional loans, on the other hand, typically require a credit score of 620.
Down-payment assistance options: With FHA loans, there are state and local programs available to borrowers to help cover some mortgage costs. They vary, so be sure to check what is available in your area.
Lower down payment required: One of the most challenging aspects of buying a home can be saving up for the down payment. FHA loans require as little as 3.5% down, making it simpler to afford a home loan if you’re on a tight budget.
Lower interest rates: The national average for FHA rates tends to be a bit lower than averages for other home loans, so you may be able to save on interest. However, there are other long-term costs to consider, including mortgage insurance.
Cons
Mortgage insurance: FHA loans have stringent mortgage insurance requirements. Unlike conventional loans that require mortgage insurance if you put less than 20% down, mortgage insurance is required on all FHA loans, regardless of your down payment. There’s also an upfront fee, which you’ll need to factor into your budget. Additionally, mortgage insurance on FHA loans tends to last for the life of the loan (unless you’ve made a sizable down payment, which is fairly rare).
Lower loan limits: If you’re looking to borrow a large sum of cash for a high-priced home, keep in mind that conforming loan limits for FHA loans tend to be much lower than with conventional loans. In most places, FHA borrowers can’t borrow more than $420,680 – although there are exceptions in more expensive zip codes.
Slightly higher down payment requirement: While FHA loans only require a 3.5% down payment, this is still slightly higher than the 3% down payment requirement for a 30-year conventional mortgage. And if your credit is subpar, between 500 and 579, you’ll need to put down 10% of the purchase price.
Strict appraisal requirements: FHA appraisals tend to be tougher than conventional appraisals. If you’re looking to buy a distressed property that you can get for a bargain and fix up, you might have some trouble.
Current mortgage rates
| Product | Interest rate | APR |
|---|---|---|
| 30-year fixed-rate | 6.94% | 6.96% |
| 30-year fixed-rate FHA | 6.15% | 7.07% |
| 30-year fixed-rate VA | 6.32% | 6.43% |
| 30-year fixed-rate jumbo | 6.99% | 7.01% |
| 20-year fixed-rate | 6.84% | 6.87% |
| 15-year fixed-rate | 6.27% | 6.30% |
| 15-year fixed-rate jumbo | 6.36% | 6.37% |
| 5/1 ARM | 5.77% | 7.45% |
| 5/1 ARM jumbo | 5.67% | 7.38% |
| 7/1 ARM | 6.47% | 7.35% |
| 7/1 ARM jumbo | 6.68% | 7.25% |
| 10/1 ARM | 6.73% | 7.28% |
| 30-year fixed-rate refinance | 7.07% | 7.09% |
| 30-year fixed-rate FHA refinance | 6.23% | 7.15% |
| 30-year fixed-rate VA refinance | 6.39% | 6.60% |
| 30-year fixed-rate jumbo refinance | 7.15% | 7.16% |
| 20-year fixed-rate refinance | 7.00% | 7.03% |
| 15-year fixed-rate refinance | 6.34% | 6.37% |
| 15-year fixed-rate jumbo refinance | 6.40% | 6.42% |
| 5/1 ARM refinance | 5.71% | 7.31% |
| 5/1 ARM jumbo refinance | 5.64% | 7.08% |
| 7/1 ARM refinance | 6.38% | 7.37% |
| 7/1 ARM jumbo refinance | 6.59% | 7.27% |
| 10/1 ARM refinance | 6.79% | 7.32% |
We use information collected by Bankrate, which is owned by the same parent company as CNET’s, to track daily mortgage rate trends. The above table summarizes the average rates offered by lenders across the country.
FAQs
Broadly speaking, average interest rates for FHA loans will look lower than average rates for conventional loans. However, it’s important to understand two key pieces of information. First, averages tell the story of a wide range of borrowers, and you are a unique borrower. If you have excellent credit (740 or greater), it’s likely that a conventional loan will offer better savings. Second, the interest rate doesn’t tell the full story of a loan; the annual percentage rate, or APR, does. Make sure you compare the APR on FHA loans to get a sense of the true costs, including mortgage insurance premiums.
The minimum down payment required for an FHA loan is 3.5% -- slightly higher than the 3% required for a conventional loan. The major difference is that with an FHA loan you can lock in a 3.5% down payment with a credit score of 580; compare that to the 5% down payment you’ll need for a conventional loan with a 620 credit score. If your credit score is between 500 and 579, you can still secure an FHA loan, but you will have to come up with a 10% down payment.
Make sure to compare rates based on the same loan term. The APR on a loan with a longer loan term will be lower, all else being equal. That can obscure which loan is less expensive.
One of the significant benefits of FHA loans is that you can be approved for one with a much lower credit score than other types of loans. FHA loans are available to borrowers who have scores as low as 500 to 580, whereas conventional loans usually require a minimum of 620.
More mortgage tools and resources
You can use CNET’s mortgage calculator to help you determine how much house you can afford. The CNET mortgage calculator factors in variables such as the size of your down payment, home price and interest rate to help you figure out the amount of a mortgage within your financial means. Using the CNET mortgage calculator can also help you understand how much of a difference even a slight increase in rates makes in how much interest you’ll pay over the life of your loan.
