Getting the most favorable rate for your FHA home loan means a big difference between your monthly payments and the total cost of your home loan.
FHA(Federal Housing Administration) loans usually have more relaxed credit and down payment terms.
Follow these five steps to get the best possible rate for your FHA home loan.
1. Boost Your Credit Score
The interest rate received is highly determined by credit score which in fact is one of the most important aspects of credit rating.
For the FHA loans, you need a credit score of 580 or better if you want to be eligible for the standard 3.5% down payment. A higher score however can get you a better interest rate.
Tips To Improve Your Credit:
- Pay Bills on Time: Make sure to consistently pay credit card, loan, and other bills payments to show that one is a good candidate for credit.
- Reduce Credit Utilization: Don’t have an outstanding balance on your credit card that is more than 30% of your total credit limit.
- Check for Errors: Read through your credit reports frequently searching for any inconsistencies and dispute them if any are found.
- Avoid New Debt: Do not apply for credit cards or loans when planning to get a mortgage.
Even a small increase in score could mean a huge difference in terms of interest you pay on your loan throughout its term.
2. Save For A Larger Down Payment
FHA loans can be acquired with a down payment as low as 3.5% though making a larger down payment may help lower your interest rate and monthly payments. With higher down payments, you also end up paying little on mortgage insurance premiums (MIP) which are required for an FHA loan.
Benefits Of A Larger Down Payment:
- Lower Interest Rates: Lenders like their clients to give higher down payments and in turn, reward them by offering a better interest rate.
- Reduced MIP Costs: FHA loans require both upfront and annual MIP, but a higher initial deposit will reduce your premium over time.
In case a person is struggling to save for a bigger down payment, inquire about programs that are available for first-time homebuyers in your area.
3. Compare Multiple Lenders
FHA loans are provided by several lenders and each of them differs widely in terms, fees, and rates they are providing. Compare multiple lenders to find the best deal for your loan. The idea is to find the one that fits your budget and financial constraints.
Steps To Compare Lenders:
- Get Prequalified: Make a point of speaking with at least three lenders to compare rate quotes.
- Evaluate Loan Estimates: Review the details provided by each of the lenders such as interest rates, fees, and closing costs.
- Negotiate: Do not be afraid to negotiate and come up with better terms based on competing offers.
Even a small reduction in your interest rate can lead to significant savings. For instance, on a $250,000 FHA loan, a 0.25% lower rate could save you hundreds of dollars annually.
4. Understand And Manage Your Debt-To-Income (Dti) Ratio
Your DTI ratio compares your monthly payments on debt against the gross monthly income that you receive. FHA loans require a debtor’s DTI below 43% but, some lenders may allow higher ratios with compensating factors.
How To Improve Your Dti:
- Pay Down Existing Debt: Reduce balances on credit cards, personal loans, or car loans until you have paid it all or only a small amount of money is owed.
- Avoid New Debt: Avoid major purchases or signing loans until after you have finalized your mortgage financing.
- Increase Income: One more thing, if possible, try to get other jobs in order to increase overall your monthly earnings
Lowering the DTI means that you’re a responsible borrower in the eyes of the lenders and you qualify for better rates on loans.
5. Lock In Your Rate
When you have shopped around and have finally decided on a particular lender, and are satisfied with the rate, then lock it in. Rate locks come in handy in protecting you from market volatility while you go through the closing and approval process of the loan.
Key Considerations:
- Length of the Lock: This depends on the closing period. They usually last for 30-60 days, so choose a period that aligns with your closing timeline.
- Fees: Some lenders charge an additional fee to lock in a rate, but this can be beneficial if you fear the rate will change and go up.
Speak to your lender regarding rate lock so that you’re protected during the closing process.
Final Thoughts
Any borrower can get the best FHA loan rate with a combination of preparation, research, and strategic planning.
By creating a favorable credit score, putting down a higher down payment, comparing multiple lenders, and managing the DTI ratio, and locking in your rate, you’ll be strategically placed to save more and get that dream house.