Nowadays, first-time homebuyers’ median income is $80,000 – hardly enough to afford a home without a loan. If you have a bad credit score or a high debt-to-income ratio, an FHA mortgage might suit you.
An FHA loan is a government-backed mortgage, ideal for first-time homebuyers with a poor financial history. FHA loans come in two standard terms – a 30-year contract and a 15-year contract.
In this guide, you’ll learn about how a 30-year fixed-rate FHA mortgage works and what factors influence your rates.
FHA loans are insured by the Federal Housing Administration. These mortgages have relaxed credit score requirements, which are ideal for low-to-moderate-income households. Unlike conventional loans, FHA mortgages accept a down payment as low as 3.5%.
To qualify for an FHA loan, you must:
FHA mortgages offer two standard terms: 15 and 30 years. A 30-year fixed-rate mortgage will last for 30 years, but homebuyers who want to pay off their loan faster can apply for a 15-year fixed mortgage instead.
Homebuyers can take out an FHA loan with their U.S. bank, credit union, or a private lender. However, the minimum requirements will vary depending on where you make your application. The good news is that borrowers can still avail of low mortgage rates amid the coronavirus pandemic.
Like private mortgage insurance (PMI) on a conventional loan, mortgage insurance protects lenders if homebuyers default. 30-year FHA mortgages charge an interminable mortgage insurance premium (MIP), no matter the size of your down payment.
Mortgage insurance charges borrowers with two fees:
Lenders typically ask for the upfront fee along with other closing costs. Borrowers who can’t afford the upfront mortgage insurance premium can request to roll it into the home loan amount.
How much your MIP costs will ultimately affect your final mortgage rate. Use online tools such as a mortgage calculator to get an accurate prediction of how much your mortgage loan will be.
Compared to conventional loans, rates on FHA mortgages are typically lower. However, this isn’t always the case. Your interest rate might vary according to:
The better your credit score and the more sizable your down payment, the lower your interest rate will be. But the better the economy is performing, the higher the mortgage rates on the housing market.
Compared to 15-year fixed mortgages, 30-year mortgage loans charge a higher interest rate. However, this rate will vary from lender to lender. Always compare quotes with multiple lenders to determine which term best suits your needs.
30-year FHA mortgages are attractive for their low-interest rates. However, these rates will fluctuate every fiscal year. Some lenders will also charge higher rates depending on how risky you are to insure or how well the economy performs.
While it can be challenging to predict your final interest rate, knowing what factors influence this amount can help direct the home-buying process.
An economically healthy society will generate higher incomes. The more consumers have, the more they will spend.
During periods of economic growth, the housing market becomes more in-demand. However, mortgage loan lenders only have a limited supply of dispensable funds. Thus, they increase interest rates to keep up with the rising demand.
On the other hand, poorly performing economies cause income to drop and spending habits to slow. As consumers stray from the housing market, lenders may offer lower interest on FHA loans.
Contrary to popular belief, the Federal Reserve does not directly influence FHA mortgage rates. However, it does set a federal funds rate, which protects financial institutions against U.S. bank failures. Depending on which state you are from and what U.S. bank you are working with, these reserve mandates might vary.
When the federal funds rate increases, it may become too expensive for one bank to borrow money from another. Thus, they pass on the responsibility to consumers, increasing rates on your loan.
No two lenders will impose the same mortgage rate. Lenders with a higher overhead or closing costs may charge higher interest.
As a rule of thumb, always compare rates with at least two different lenders. Lender rates can appear lower than market value if you aren’t quoting accurately. Always present your complete credit profile and specify the terms of your 30-year loan to get an accurate quote.
Calculate your annual percentage rate (APR) to unearth any hidden costs and get a complete picture of your closing costs and overall mortgage.
If you are like the average American who has $90,460 in debt, you might still qualify for FHA loans – you just might not get the rates you want. FHA mortgage lenders will review your financial history to determine how likely you are to repay your loan. If you have a positive borrowing history, lenders will consider you less risky to insure.
Naturally, higher credit scores and a lower debt-to-income ratio will qualify you for lower interest rates. Some FHA lenders will accept a credit score of as low as 500. However, homebuyers will have to make a down payment of at least 10% to obtain a favorable interest rate.
Your mortgage’s loan-to-value ratio compares the home value to the base loan amount. Calculate your LTV ratio by dividing the total loan amount by how much the property costs.
Suppose you can make a 5% down payment ($7,500) on a $150,000 home. Divide how much you are borrowing ($142,500) by the property amount to get an LTV ratio of 95%.
The good news is that FHA loans accept loan-to-value ratios of up to 96.5%. However, your final interest rate may increase. You can reduce your LTV ratio by making a larger down payment or finding a more affordable property.
Discount points pertain to the amount of money you pay to your lender to lower your interest rates. How much one point is equivalent to will depend on your lender. For instance, one point might equal $1,000, but in most cases, a point equals 1% of the total cost of your loan.
If your lender offers discount points, you can “buy down your rate” by up to 0.25% of the entire borrowing amount.
With the help of tools like a mortgage calculator, estimating your loan’s total cost is relatively simple.
First, you’ll have to note down the following information:
Once plugged into the mortgage calculator, it will reveal information such as:
Note that online mortgage calculators do not include the cost of mortgage insurance premiums.
Below are a few reasons you should consider an FHA 30-year fixed-rate loan and what you should look out for.
A conventional 30-year fixed loan is not the same as one insured by the Federal Housing Administration (FHA). Below are a few of their main differences.
Both conventional and FHA loans charge mortgage insurance. However, private mortgage insurance (PMI) on a conventional loan is only required of people who cannot afford a down payment of more than 20%. Mortgage insurance premiums (MIP) on an FHA loan are required, no matter how large your down payment is.
While conventional borrowers can eliminate PMI when they achieve home equity of at least 20%, MIP cannot be terminated. The only way to eliminate MIP is to refinance out of your FHA loan.
FHA loans are popular for their low down payment requirements. However, you can only qualify for a 3.5% initial payment if your credit score is at least 580. People with credit scores as low as 500 must make an initial payment of at least 10%.
Conventional loans demand higher down payments to mitigate risk. While a 20% down payment isn’t required, you will have to pay PMI if you cannot provide the amount. PMI will increase your overall rates.
Conventional home loans have stricter credit score requirements of at least 620 or higher. Not to mention, they will also demand a lower debt-to-income ratio of no higher than 36%. First-time homeowners will benefit from lenient FHA loan requirements, qualifying with a credit score of only 580.
Keep in mind that a higher credit rating will lower your overall interest payments, regardless of what type of loan you need. You can improve your score by settling outstanding debt payments such as those on credit cards or existing loans.
Because they are government-backed loans, FHA lenders are protected if a borrower defaults. Thus, FHA mortgage insurance can offer competitive rates.
Ultimately, the same factors will influence your final rates, whether you are taking out a conventional or FHA loan. These factors include:
Below are answers to a few frequently asked questions about 30-year FHA mortgages.
It depends. Conventional mortgage products aren’t always cheaper than FHA loans. Instead, the selling point of FHA loans is that they have lenient credit requirements for low-to-median-income borrowers.
Yes, you can lower your FHA loan rate by paying off credit card debts or reviewing your credit report online. You can also make a bigger down payment or consider earning discount points.
A longer-term FHA loan will benefit you if you need more time to pay off your mortgage and want a lower rate. However, it will take more time to build equity in your home unless you make extra payments.
Fixed-rate and adjustable-rate FHA loans over 30 years differ in how much interest you pay. Fixed FHA loan rates are predictable and easy to repay. Adjustable-rate type loans charge lower interest on the onset and increase over time.
Get a better idea of how much either loan will cost by calculating your annual percentage rate (APR).
30-year FHA loan rates are advantageous to borrowers who have a poor financial history and need more time to pay off their mortgage. Whether a loan term of 30 years is right for you depends on what you can afford and how other factors affect your closing costs and borrowing amount.
Can’t decide between an FHA loan term of 15 or 30 years? Consult with the experts at Wesley Mortgage, LLC. Visit our website for more information about FHA loans and whether you qualify.