What Determines FHA Loan Rates?
The FHA, or Federal Housing Administration, is a government agency that backs mortgages. FHA backing makes loans more attractive to lenders, who are willing to accept a smaller down payment on these loans.
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Misconceptions
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The FHA does not set interest rates for loans that it backs. Loan approval and the interest rate are determined by the individual lenders.
Factors
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Lenders take into consideration your credit score, employment situation and debt-to-income ratios. The higher your credit score, the better the interest rate you will receive. In addition, the lower your debt-to-income ratios, meaning the percentage of income taken by debt payments, the better your interest rate. According to Interest.com, lenders usually do not allow mortgage expenses to exceed 31 percent of income and total debt payments to exceed 43 percent.
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Size
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According to Interest.com, FHA mortgage rates will be about one-eighth of a percentage point higher than conventional mortgages because even with FHA backing these loans are slightly more risky than conventional mortgages.
FHA Loan Mortgage Insurance Rates
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With an FHA loan, you will also have to pay a 0.5 percent annual premium based on the size of your loan for mortgage insurance until you achieve 22 percent equity in your home. The rate for mortgage insurance is set by the FHA.
Considerations
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The FHA must have congressional approval to increase the mortgage insurance premium. According to the Chicago Tribune, in early 2010 the FHA was seeking congressional permission to increase the annual rate.
Warning
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Starting in the summer of 2010, the FHA will require a 10 percent down payment if your credit score is below 580.
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