How FHA Interest Rates Differ from Other Home Loans
A home is among the largest investments people make and they usually require a mortgage to finance the home purchase. FHA home loans are loans backed by the Federal Housing Administration (FHA) and offered to approved lenders. These loans are useful for first-time home buyers or buyers who may not have a high credit score. Here is how the interest rates for FHA loans differ from other home loan interest rates.
FHA Vs Conventional Loan Interest Rates
The FHA insures loans issued by approved lenders, meaning the lenders have less to lose should the borrower default on the loan. As a result, FHA lenders charge lower interest rates compared to traditional loans. Interest rates for conventional loans vary depending on the borrowers’ credit score, downpayment, and loan amount. Here are other factors that impact the costs of FHA loans and conventional loans.
Minimum Down payment
FHA home loans require a minimum down payment of 3.5% of the home’s purchase price from borrowers with a credit score of 580 and above. Borrowers with a credit score below 580 must pay a down payment of 10% when borrowing from FHA lenders.
Traditional lenders require a down payment of at least 3% of the purchase price from first-time home buyers. The down payment limit goes up to 5% for borrowers who are not first-time home buyers and make less than 80% of the medium income in the area they intend to buy a home.
Credit Scores
FHA lenders have more lenient credit score requirements to accommodate borrowers who do not qualify for traditional home loans. FHA loan applicants can qualify for loans with a credit score of 580, with some lenders even accepting borrowers with credit scores as low as 500. Lenders that accept borrowers with credit scores below 580 may have stricter minimum downpayment requirements. Conventional lenders usually require borrowers to have a credit score of at least 620.
Mortgage Insurance
Lenders require borrowers to buy a mortgage insurance policy as a safeguard should the borrower default on loan payments or pass before clearing their mortgage. FHA loan borrowers must pay an upfront mortgage insurance premium equal to 1.75 % of the amount borrowed. They also must pay monthly mortgage insurance premiums determined by the amount, length of the loan, and downpayment. Certain FHA lenders permit you to incorporate the upfront mortgage insurance payment into your loan, allowing you to pay it along with your other monthly premiums.
Conventional lenders require private mortgage insurance (PMI) from borrowers with a downpayment of less than 20% of the home’s purchase price. If your downpayment is less than 20%, you must pay monthly PMI premiums alongside your loan payments until you achieve 20% ownership of the property. After you’ve reached this threshold, your lender will cancel PMI.
Enjoy the Benefits of FHA Loans Today
Buying a home is an expensive undertaking that becomes easier with loan financing. FHA loans are particularly beneficial if you need financing but have a credit score that disqualifies you from conventional home loans. FHA home loans also have lower interest rates compared to conventional loans, which can make them easier to pay off. Consult your lender today to learn more about the benefits of FHA home loans.
