FHA loan rates: Everything you need to know

An FHA loan is a mortgage insured by the Federal Housing Administration (FHA). These loans are popular among first-time homebuyers — who accounted for 82% of FHA loan originations last year — because buyers can qualify with a credit score as low as 500 or a down payment of 3.5%. They also come with competitive interest rates because they have federal government backing. Each lender has a different way of setting mortgage rates, so it’s a good idea to compare your options when shopping for a mortgage loan.

What determines FHA mortgage rates?

FHA loan mortgage rates are based on the borrower’s financial standing and a combination of economic factors. Here’s a look at the elements that influence current FHA mortgage rates: 

Federal Reserve’s monetary policies

The Federal Reserve, which is the nation’s central banking system, can influence mortgage rates through its monetary policies. When the Fed changes the federal funds rate, mortgage rates typically move in the same direction. For instance, a higher Fed rate increases operating costs for banks and credit unions. Those institutions usually increase interest on loans they offer, including mortgages. 

The Fed also buys U.S. Treasury and mortgage-backed securities in times of economic distress, such as during recessions. Buying massive quantities of these securities can stimulate the economy and lead to lower mortgage rates. 

Economic trends

When inflation rises or falls, mortgage interest rates tend to follow suit. A period of very high inflation (and high rates) may be followed by a period of lower rates if a recession hits. Demand for homes tends to drop during recessions because prospective homebuyers are generally less able to afford a new home purchase. In response, the Fed may lower its benchmark rate, pulling down current mortgage rates as well. 

Borrower profile

A borrower’s financial profile also affects the interest rate they receive. Here are some details lenders examine when determining rates:

• Credit score: Your credit score demonstrates how likely you are to make monthly payments on time. A good FICO credit score is between 670 and 739. Generally, higher credit scores can help you get better mortgage rates. 
• Loan-to-value ratio: Making a large down payment reduces the lender’s risk because the loan size is smaller and you have more at stake in the home. Increasing your down payment if you’re able could help you score a lower rate. 
• Mortgage length: A shorter loan term also reduces the lender’s risk because you’re repaying the loan quicker, so there’s a lower chance that you’ll default. The lower risk translates into better interest rates.
• Loan type: Some loan programs usually offer lower rates. For instance, FHA loans typically have lower interest rates than conventional mortgages because of their government backing. 

How does your credit score affect FHA rates?

Your credit score plays a major role in the rate you receive. Generally, a higher credit score shows you have a proven track record of repaying your debts as agreed. This reduces the lender’s risk because there’s a lower chance you’ll stop making mortgage payments. Borrowers with credit scores around 740 or above typically receive the best mortgage rates. 

When applying for an FHA loan, you can qualify with a credit score between 500 and 579 if you have a down payment of at least 10%. A score of 580 or higher allows you to put down 3.5%. 

If you have a lower credit score, lenders can still offer you competitive rates thanks to government backing. The FHA requires all borrowers to pay upfront mortgage insurance that costs 1.75% of the loan amount, and annual insurance for up to the life of the home loan. The money the agency collects from these fees helps cover lenders in case a borrower defaults, which helps maintain more affordable rates. 

Can you refinance for a better FHA rate?

Yes, you can refinance an FHA loan to get a better interest rate. There are several options:

• Streamline refinance: This program makes it cheaper and easier for existing FHA loan borrowers to refinance with lower rates and with less paperwork. 
• FHA simple refinances: You may swap out your current FHA loan for a new FHA loan with either a fixed or adjustable interest rate. This refinance is the most straightforward and has no cash-out option. 
• FHA 203(k) refinances: These so-called rehabilitation loans allow you to refinance a home that needs improvements, bundling the cost of the home and the repairs into one loan. You replace your existing loan with an FHA 203(k) loan and receive extra funds for repairs.
• Conventional mortgage: Some FHA loans come with lifelong mortgage insurance premiums, but refinancing into a conventional loan allows you to eventually remove the mortgage insurance once you’ve built enough home equity. You may also qualify for a lower rate if your financial profile has improved since taking out the FHA loan. 

FHA loans vs. other mortgage types

FHA loans aren’t your only option when you’re shopping for a mortgage. Here’s how these loan options stack up against others:

Pros and cons 

FHA mortgage rates FAQ

How can I secure the lowest FHA rate?

Having a good credit score (670 or higher), a low debt-to-income ratio (DTI), and a stable income and job history for at least three years can help you secure the lowest FHA rates. Making a sizable down payment can also help lower the rate you pay. Your DTI refers to how your pre-tax income compares to your monthly debt payments. FHA loans typically require a total DTI below 43%. 

For example, say you earn $6,000 a month before taxes, and your debt payments — including credit cards, student loans, and potential mortgage — total $2,500. You would divide $2,500 by $6,000 to calculate your DTI, which would be about 42% in this case. 

Are FHA rates lower than conventional?

FHA loan rates run slightly lower than conventional loan rates because they pose less risk to lenders. The government insures the loan, so if a borrower defaults, the lenders know they will be covered. The specific rate you receive depends on factors like market conditions, your credit score, and your DTI. 

Will refinancing affect my FHA rate?

Refinancing will most likely affect your FHA rate because you’ll take out a new mortgage with a new rate and term. The interest rate you receive depends on market conditions, economic factors, and your financial profile at that time..

How often do FHA rates change?

Lenders can change FHA mortgage rates daily, and sometimes several times a day, depending on market conditions and other economic factors. If you’re concerned about interest rates rising, you could look into getting a mortgage rate lock. This effectively freezes your quoted interest rate as long as you close within a certain window and there are no major financial changes on your end that could alter your borrower profile.