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FHA Mortgage Rates

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As a result of the subprime mortgage meltdown and the global economic crisis of 2009, home mortgages have become more difficult to obtain. Even borrowers with good credit are often required to pay higher interest rates and put more money down when purchasing a home or refinancing. Borrowers with bad credit or little credit history may find it very difficult to get home financing. For many borrowers, an FHA mortgage looks like a good solution.

What is an FHA mortgage? The term is often misunderstood, and many buyers believe that FHA mortgage rates are set by the government and are offered to the public.

This is not what the FHA does. The FHA (the Federal Housing Administration, which is a part of the U.S. Department of Housing and Urban Development, or HUD) does not make loans. The FHA does not set mortgage rates or sell houses. The FHA works with banks and FHA-approved lenders to insure mortgages on single family and multifamily homes in the United States. Since its inception in 1934 the FHA has become the world's largest insurer of mortgages, covering over 34 million properties.

How does the FHA help homebuyers? By providing insurance to lenders so that if you default on your mortgage, the FHA will pay off the lender. It is a form of private mortgage insurance, only it is provided by the U.S. government. This insurance allows a lender to make mortgage loans to borrowers who may have poor credit or who otherwise would not qualify for a prime loan rate.

Determining Your FHA Mortgage Rate

When you go to an FHA-approved lender to apply for a mortgage, the lender may ask you to apply for an FHA mortgage (remember, this is just a term of convenience; your mortgage will come from your lender, not the FHA). As part of the application process you will be asked to fill out a separate FHA mortgage application. You will need to supply information about your previous addresses, your employment history, W2 forms, and federal income tax forms for the past two years. Based on the information you provide, plus the results of an FHA investigation into your credit history, the FHA may qualify you and offer to insure your mortgage.

The FHA offer to insure will allow your lender to give you better terms-perhaps by giving you a lower interest rate or accepting a down payment as low as 3.5%. Here are some of the factors that will determine your FHA mortgage rate:

  • Amount of loan
  • Length of loan
  • Adjustable-rate (ARM) or fixed-rate
  • Amount of down payment
  • Discount points
  • Closing costs
  • Your credit rating
  • Your credit history
  • Your income level
  • Lock-in period
  • Conforming loan limits

Let's review a few of the factors that affect your FHA mortgage rate. For example, the loan period is a significant factor. Shorter loans (say, 15 years) will raise the cost of your monthly payments but will save you thousands of dollars in interest payments over the life of the loan.

At the beginning of each year Fannie Mae and Freddie Mac establish conforming loan limits, which may affect your interest rate. If the amount you borrow exceeds the conforming loan limits that have been set for the year, your interest rate may be higher.

An adjustable rate mortgage may initially give you a lower rate than a fixed interest mortgage, but your payments are subject to increase as soon as the interest rate changes.

The size of your down payment will also affect your interest rate. While FHA loans permit down payments as small as 3.5%, a larger down payment, especially greater than 20%, will get you the best available rates. The more money you can offer as a down payment the better deal you will get, because it shows the lender that you are capable of saving money and you are serious about your finances. And because you are borrowing less, your monthly payments will be lower.

There are many factors that go into determining your FHA mortgage rate. It is worthwhile to apply for an FHA mortgage to get the best deal possible.