An FHA loan is a mortgage loan insured by the Federal Housing Administration and made through an FHA-approved lender. The insurance protects lenders against borrower default so they can originate loans for eligible buyers who don’t qualify for conventional financing.
FHA loans have low down payment requirements, you can get one with a lower credit score than conventional loans allow, and the loan rates are usually comparable to conventional loan rates.
Find current interest rates in your area
How FHA loan rates are set
Every bank sets its own FHA loan interest rates based on several factors.
Market-based factors
Lenders respond to local market conditions in the same way other businesses do, taking into consideration competitors’ rates, demand for their products, and the cost of doing business.
Economic factors
Whereas market factors are primarily local, economic factors affect the nation and the economy as a whole.
Federal funds rate
The federal funds rate is the rate at which banks loan money to each other overnight, and the Federal Reserve uses this rate to control the money supply.
Mortgage rates tend to move in the same direction as the federal funds rate.
U.S. prime rate
The U.S. prime rate is the rate at which a majority of America’s largest banks issue business loans to corporate clients. Lenders use the prime rate to set rates on adjustable-rate mortgage (ARM) loans.
An ARM rate is made up of a benchmark interest rate plus a margin of a few percentage points.
Bonds
Ten-year Treasury bond yields serve as a benchmark of sorts for 30-year fixed-rate mortgage loans. When Treasury yields increase, so do yields on mortgage-backed securities (MBS), which are pools of loans secured by real estate. And when MBS rates go up, lenders increase mortgage rates.
Mortgage-backed securities trade on the open market, so rates fluctuate throughout the day, causing mortgage rates to fluctuate as well. The FHA interest rate you see today is likely to change by tomorrow, if not sooner.
Bond prices move in the opposite direction of bond yields, so when prices increase, bond yields and mortgage rates fall.
How to get the best FHA rate
Lenders compete with each other to woo borrowers, so rates differ from one to the next. They also differ from one borrower to the next. Use these tips to gain an edge on both fronts:
- Compare quotes from several lenders: If you’re not ready to buy just yet, request prequalifications, which only require a soft pull on your credit. Soft pulls have no impact on your credit score.
- Raise your credit score: Check your report for errors and forgotten accounts that need your attention. Otherwise, keep paying down debt and making on-time payments on your bills.
- Make the largest down payment you can afford: You can take out an FHA loan with just 3.5% down, but a bigger down payment makes you a less-risky borrower, which could qualify you for a lower rate.
- Think twice before locking in: Locking in a rate safeguards you against rate increases, but it also prevents you from getting a lower rate if interest rates drop before you close.
FHA loan limits and guidelines
The FHA sets limits on how much you can borrow using an FHA loan. It also has lending guidelines to ensure that borrowers have solid credit and are able to afford their loans.
The loan limit for 2024 is $498,257, or 65% of the conforming loan limit, for a one-unit home in most areas of the U.S. The limit increases to $1,089,300 for a single-unit home in a designated high-cost area, and $1,633,950 for a single-unit home in Alaska, Hawaii, Guam, or the U.S. Virgin Islands.
Borrower requirements for FHA loans include:
- Valid Social Security number
- A credit score of 500 or higher and acceptable credit history
- 3.5% down payment
- 31% ratio of housing costs to income (up to 47% for borrowers with verified cash reserves, 580 credit score, and other qualifying criteria)
- 43% debt-to-income ratio (or up to 50% for borrowers with verified cash reserves, 580 credit score, and other qualifying criteria)
Pros and cons of FHA loans
An FHA can help you buy a home even if you have minimal down payment money, modest income, and past credit problems. But it’s not the best choice for everyone. These pros and cons can help you decide if an FHA loan might be right for you:
Pros
- As little as 3.5% down
- Allows gift funds from employers, friends, charitable organizations, and government programs toward closing costs
- Easier to qualify for than a conventional loan
- Competitive rates
Cons
- Upfront mortgage insurance premium of 1.75%
- Annual mortgage insurance premium for terms of 15 years or more is 0.50% to 0.75% of the loan amount, depending on the loan-to-value ratio
- Pay mortgage insurance premiums for 11 years to the length of the mortgage term, depending on down payment, regardless of equity
Alternative mortgage options
An FHA loan might be the first one you think of, especially if you’re a first-time buyer. But it’s not your only option. Here are other loan types to consider:
- Conventional: If you have a credit score of 620 and can put down 20% on your purchase, a conventional loan can help you avoid paying private mortgage insurance (PMI).
- VA: Eligible veterans and their families can buy a home with no money down using a guaranteed loan from the Department of Veterans Affairs. Note that VA loans charge an upfront funding fee.
- USDA: The U.S. Department of Agriculture guarantees loans for lower-income borrowers purchasing a home in a location considered rural by the USDA. No down payment is required for USDA financing, but borrowers pay an upfront and annual guarantee fee.
FAQ
Is an FHA loan cheaper than a conventional loan?
Not necessarily. FHA loan rates may be slightly lower but aren’t always. Also, borrowers always pay an upfront mortgage premium, which many roll into their loan, and pay mortgage insurance for at least 11 years.
Do Realtors prefer conventional loans over FHA loans?
Realtors may prefer conventional loans because they’re more likely to close, and they often make it easier to get an offer accepted.
Will interest rates go down in 2024?
Possibly. Many expert sources, including the Mortgage Bankers Association and Fannie Mae, expect a slight decrease in the fourth quarter of 2024.
Who qualifies for an FHA loan?
You can qualify for an FHA loan if you meet the following criteria:
- Have a Social Security number
- A credit score of 500 or higher and acceptable credit history
- 3.5% down payment
- Need to borrow $472,030 or less ($1,089,300 in high-cost areas)
- Have no more than a 31% ratio of housing costs to income (up to 47% for borrowers with verified cash reserves, 580 credit score, and other qualifying criteria)
- Have no more than a 43% debt-to-income ratio (or up to 50% for borrowers with verified cash reserves, 580 credit score, and other qualifying criteria)
What is a good FHA rate?
What constitutes a good rate varies by borrower, but one rule of thumb for fixed-rate loans is to look for a rate that is near the average conventional loan rate posted by Freddie Mac.
