Many borrowers often ask How Lenders Determine Mortgage Rates On FHA Loans.

• In general, lenders charge higher mortgage rates if the borrowers are high-risk borrowers
• Higher risk borrowers are determined with credit scores on government loans
• The lower the borrower’s credit scores, the higher the risk
• Nobody has a crystal ball as on how timely a borrower will be
• However, lenders, as well as other creditors, will use the borrower’s past payment performance as an indicator for future performance
• The ability to repay the new mortgage is very important
• Lenders are not interested in foreclosing property in the event borrower’s default on their loans
• Lenders want borrowers to make timely payments on their mortgage
• This is why mortgage rates for borrowers with lower credit scores are much higher than a borrower with high credit scores

How Lenders Determine Mortgage Rates On FHA Versus Conventional Loans

There are certain factors that lenders consider risk. With risk, there are pricing adjustments on mortgage rates.

• Conventional loans are not government loans
• There is no government agency like HUD, VA, USDA that insure and/or partially guarantee conventional loans
• Therefore, there are pricing adjustments on mortgage rates with conventional loans
• Any loan to value that is greater than 80%, there is a loan level pricing adjustment on conventional loans
• This is because the less equity borrowers have on conventional loans, the higher the risk for lenders
• This is not the case with government loans
• For example, there are no pricing adjustments on mortgage rates with FHA loans with 3.5% versus 20% down payment

This is because if the borrower defaults on an FHA loan, FHA will insure and partially guarantee the lender against the loss.

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How Lenders Determine Mortgage Rates On FHA Versus Conventional Mortgage Rates

FHA loans are one of the most popular loan programs in the United States. Due to the government guarantee, lenders are more than eager to extend credit and offer FHA loans with a 3.5% down payment with less than perfect credit at great mortgage rats. Due to the guarantee by HUD, mortgage rates on FHA loans are lower than conforming loans. On average, mortgage rates on FHA loans are anywhere between 0.25% to 0.50% lower than conventional rates when comparing borrowers with similar credit scores. However, FHA loans have a one-time FHA mortgage insurance premium of 1.75% and a lifetime FHA annual mortgage insurance premium of 0.85%. Any conventional loans with greater than 80% loan to value require private mortgage insurance. HUD allows borrowers with credit scores as low as 500 to qualify for an FHA loan. The minimum credit score required to qualify for a 3.5% down payment home purchase FHA loan is 580 FICO.

Other Pricing Adjustment Factors On Mortgage Rates On FHA Loans

There are other pricing adjustments on mortgage rates with FHA loans besides credit scores. Loan Level Pricing Adjustments are also referred to as LLPAs.

The higher the risk, the higher the mortgage rates.

Here are factors that affect mortgage rates on FHA loans:

• Credit scores
• Debt to income ratio: The higher the DTI the higher the rates
• Manual versus automated underwriting system: There are pricing hits on manual underwriting
• Type of property: Single-family homes are considered the safest with no pricing adjustments
• There are pricing adjustments on condos, townhomes, and 2 to 4 unit multi-family homes
• Loan size: There are pricing adjustments on lower loan size such as under $200,000
• Loan Type (Purchase, Streamline Refinance, 203k Rehab, Construction)
• There are LLPAs on where the property is located: Some counties and states are considered a higher risk for lenders

Prior bad credit has no pricing adjustments on mortgage rates. For example, a prior bankruptcy, foreclosure, deed in lieu of foreclosure, a short sale has no bearing on mortgage rates. Lenders understand borrowers can have prior periods of bad credit due to extenuating circumstances.