What Main Factors Affect FHA Mortgage Rates
This BLOG On What Main Factors Affect FHA Mortgage Rates Was UPDATED On July 28, 2017
FHA mortgage rates have been steadily for the past year. FHA mortgage rates have been historically low due to HUD, the parent of the Federal Housing Administration (FHA), guaranteeing FHA Loans in the event borrower defaults on their FHA Loans and goes into foreclosure.
- A 3.25% fixed rate 30 year mortgage is probably the lowest rate on record.
- However, FHA mortgage rates do fluctuate like Conventional or other mortgage loans.
- The rapid spike in FHA mortgage rates have hurt millions of mortgage loan borrowers who have not locked their mortgage rates to refinance their home loans.
- Refinance mortgage loan borrowers need to make sure that they lock their FHA Mortgage Rates early before they can spike up.
- FHA Mortgage Rates not locked can delay closing their mortgage loans because they could no longer obtain a net tangible benefit.
- Increase in mortgage rates means increase in their mortgage payment.
Higher DTI Due To Higher Rates
One of the advantages of FHA mortgage loans versus conventional mortgage loans is that FHA mortgage loans have lenient mortgage underwriting guidelines.
- With conventional mortgage loans, the maximum debt to income ratio allowed is 45% to get an approve/eligible per Automated Underwriting System (AUS).
- However, with FHA mortgage 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 for 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.
Debt To Income Ratios Explained
Debt to income ratio is the total amount of monthly payments you have divided by the total monthly gross income.
- For example, if a consumer has a monthly automobile loan payment is $200, credit card payment of $100, and proposed new mortgage housing payment will be $800 which includes property taxes, mortgage insurance, and property insurance.
- Total monthly payment is $1,000.
- Now, lets say gross monthly income is $2,000.
- To calculate borrowers 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 50% debt to income ratio.
- Borrowers would not qualify for a conventional mortgage loan but will qualify for a FHA mortgage loan on the above case scenario.
Higher FHA Mortgage Rates Means Higher Monthly Payment
Folks who got devastated from the recent FHA mortgage rates spike are those mortgage loan borrowers who had high debt to income ratios. Back in May 2013 is when FHA Mortgage rates started to climb with no correction.
- A $10 increase in monthly payment can disqualify a mortgage loan borrower with borderline debt to income ratios.
- Maximum allowed 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.
- 56.9% is the maximum debt to income ratio allowed for automated approval.
- Anything over 46.9%/56.9% DTI threshold will not render an automated approval.
- No exception.
Factors That Determine FHA Mortgage Rates
FHA mortgage rates are determined by these factors:
- Credit Scores
- Type of Property
- Loan Size
Loan To Value (LTV) is not a determinant on FHA Mortgage Rates like they are on Conventional Loans. Reason being is because HUD guarantees against default if the borrower goes into foreclosure. However, in order for HUD to insure FHA Loans, lenders need to make sure that borrower and property meets FHA Guidelines.