Mortgage Rates on FHA vs Conventional Loans

Mortgage Rates on FHA vs Conventional Loans

ByMargarett Jurilla
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This guide covers mortgage rates on FHA vs conventional loan rates. Mortgage rates on FHA vs conventional loans have been steady for the past year. Mortgage rates on FHA vs conventional loans have been historically low. This is due to HUD, the Federal Housing Administration (FHA) parent, guaranteeing FHA loans. In general, mortgage rates on FHA vs conventional loans have been lower due to the government guarantee from HUD.

Lenders offer lower mortgage rates on FHA vs conventional loans because of the government guarantee from HUD. Any government agency does not back conventional loans.

Lenders have more risk on conventional loans compared to FHA loans. HUD insures lenders if borrowers default on their FHA loans and go into foreclosure. A 7.25% fixed-rate 30-year mortgage is probably the lowest rate in 2023. However, mortgage rates rates on FHA versus conventional loans fluctuate.

DTI Guidelines on FHA Versus Conventional Loans

One of the advantages of FHA versus conventional mortgage loans is that FHA loans have lenient mortgage underwriting guidelines. With conventional mortgage loans, the maximum debt-to-income ratio allowed is 50% to get an approve/eligible per Automated Underwriting System (AUS).

With FHA loans, the maximum debt-to-income ratio allowed is 56.9% back-end DTI, and the maximum front-end DTI allowed is 46.9%.

The above DTI caps apply to borrowers with at least a 620 FICO credit score. Under 620 FICO credit scores, FHA DTI Cap is at 43% for it to render an approve/eligible per AUS Findings.  The rapid spike in mortgage rates has hurt millions of mortgage loan borrowers who have not locked in their mortgage rates to refinance their home loans.

Debt-To-Income Ratios Explained

The debt-to-income ratio is the total amount of monthly payments you have divided by the total monthly gross income. Refinance borrowers need to lock in their FHA mortgage rates early before they can spike up. Mortgage rates on FHA vs conventional loans that are not locked can delay closing their mortgage loans because they can no longer obtain a net tangible benefit. This article will discuss mortgage rates and pricing adjustments for FHA mortgage rates. For example, here is a case scenario:

If a consumer has a monthly automobile loan payment of $200—a credit card payment of $100—the proposed new mortgage housing payment will be $800, which includes property taxes, mortgage insurance, and property insurance. The total monthly payment is $1,000.

Now, let’s say the gross monthly income is $2,000. The borrower’s debt-to-income ratio is calculated by taking the borrower’s $1,000 monthly expenses and dividing it by gross income of $2,000, which yields a 50% debt-to-income ratio. Borrowers would qualify for an FHA mortgage loan in the above scenario. Higher mortgage rates mean a larger mortgage payment.

High FHA Mortgage Rates Means Higher Payment

Folks who were devastated when interest rates spiked affected those borrowers who had high debt-to-income ratios. In May 2013, FHA mortgage rates started to climb with no correction. The borrower’s credit score is the biggest determinant of pricing mortgage rates. Other factors come into play, such as pricing rates, but not as much of an impact as credit scores:

A $10 increase in monthly payment can disqualify a mortgage loan borrower with borderline debt-to-income ratios.

The maximum DTI limit allowed by FHA mortgage guidelines is 46.9% front-end DTI and 56.9% back-end DTI to get an approve/eligible per AUS findings. The maximum front-end debt-to-income ratio is 46.9%, and 56.9% is the maximum back-end debt-to-income ratio allowed on FHA loans for automated approval. Anything over the 46.9%/56.9% DTI threshold will not render an automated approval. No exception

Factors That Determine Mortgage Rates on FHA vs Conventional Loans

These factors determine mortgage rates on FHA vs conventional loans:

  • Credit Scores
  • Manual Underwriting Versus Automated Underwriting System
  • Type of Property
  • Loan Size
  • County and State of the Subject Property

Loan-to-Value (LTV) is not a determinant of mortgage fates on FHA versus conventional loans—the reason why mortgage rates on FHA vs conventional loans are lower. The main reason for mortgage rates on FHA vs conventional loans is the government guarantee. Mortgage rates on FHA vs conventional loans are lower because HUD, the parent of FHA, guarantees lenders against default if the borrower goes into foreclosure. However, for HUD to insure FHA loans, lenders must ensure borrowers and properties meet HUD guidelines.

The Importance of Meeting Agency Mortgage Guidelines

Suppose a mortgage underwriter makes a mistake and the borrower does not meet any part of HUD agency mortgage guidelines. In that case, the FHA loan is not insurable after funding, which means the lender cannot sell it on the secondary market.  FHA loans that cannot be sold on the secondary market are called scratch and dent mortgages. Scratch and dent mortgages can be sold at a discount on a private secondary investor market. This is the reason why underwriters are so careful when underwriting mortgage loans.

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