An FHA loan is a home loan insured by the Federal Housing Administration designed for first-time homebuyers. With more flexible rates and requirements than conventional loans, FHA loans can be compelling for buyers with limited financial resources and lower credit scores. That's especially helpful in today's economy, where interest rates and housing prices are rising, causing monthly mortgage payments to increase.

You can qualify for an FHA loan even if you've been a homeowner in the past, as long as you haven't owned a home within three years. That said, FHA loans do require an upfront mortgage insurance payment at the time of closing.

With experts anticipating more rate hikes throughout 2022, now may be the best time to lock in a low rate on an FHA home loan.

Current FHA loan rate trends

Interest rates for a 30-year fixed-rate FHA loan are now hovering around 4.5%, up from just under 3% at the beginning of the year. That's a full percentage point lower than the current interest rate for a 30-year fixed-rate conventional mortgage, which is lingering around 5.5%. Though a 1% difference in rates may sound small, a lower rate can save you tens of thousands of dollars over the lifetime of your loan. 

In an effort to tamp down on inflation, which reached its highest level in 40 years in March, the Federal Reserve has started raising interest rates, and will continue throughout the year. Rising rates will make your monthly mortgage payments more costly because you'll be paying more in overall interest. 

What are FHA loans and who are they best for?

FHA loans are best for first-time homebuyers who have low credit scores and can't afford to make a sizable down payment. If you have a high credit score or can make a hefty down payment, it may be advantageous for you to take out a conventional loan because your interest rate and private mortgage insurance requirements will be cheaper. 

Because they're backed by the federal government, FHA loans are considered particularly secure mortgages. Overall, they're easier to qualify for than conventional loans and have less stringent requirements for your debt-to-income ratio, that is, the amount of monthly debt you hold divided by your monthly income. For example, if you hold $1,000 in monthly debt and bring in $4,000 a month, your DTI would be 25% ($1,000 divided by $4,000). 

In general, most lenders like to see a DTI between 36% and 45% for conventional loans. With an FHA loan, your DTI can be as high as 43%. Even though you can qualify with a relatively high DTI, you still need to prove a consistent employment history, and will need to show financial documents (pay stubs, W-2s and bank statements) in order to work with a mortgage lender. 

FHA loan fees

FHA loans do have fees, including many of the ordinary fees mortgage lenders charge for their services. But one of the most expensive fees to keep in mind with FHA loans is the required Mortgage Insurance Premium, which raises the cost of your monthly mortgage payments. 

You will be required to pay MIP no matter what size down payment you make on an FHA loan. You typically need to pay an upfront fee for MIP when closing on your house, which will amount to 1.75% of your loan, on top of paying a monthly premium of anywhere from 0.45% to 1.05% of your loan, depending on the size of your down payment. So, for a $500,000 loan, that could mean a $8,750 upfront fee.

It's important to note that while you can drop private mortgage insurance on conventional loans once you're built up 20% equity in your home, you often cannot get rid of MIP regardless of how much equity you have in your home. (Equity is the difference between what you owe on your mortgage and what your home is currently worth.) You can only get rid of MIP on FHA loans if you make a down payment of 10% or higher, and even then, it can only be canceled after 11 years.

Pros of a FHA loan

• Low down payment overall: One of the most challenging aspects of buying a home can be saving up for a down payment. FHA loans require as little as 3.5% down, making it simpler to afford a home loan if you're on a tight budget.
• Low credit score requirements: With an FHA loan, you can be approved with a credit score in the 500s if you're able to make a down payment of 10% (a credit score of 580 or above requires a 3.5% minimum down payment). Conventional loans, on the other hand, typically require a credit score of 620.
• Lower interest rates: FHA mortgage rates tend to be lower than conventional loan rates, which can save you thousands of dollars over the life of your mortgage.   
• Local home buying and down payment assistance programs: With FHA loans, there are state and local programs available to borrowers to help cover some of your mortgage costs. Since they vary, be sure to check what is available in your region. 

 Cons of a FHA loan

• Down payment requirement is not as low as conventional loans: While FHA loans only require a 3.5% down payment, this is still slightly higher than the 3% down payment requirement for a 30-year conventional mortgage.
• Mortgage Insurance Premium: FHA loans have much more stringent mortgage insurance requirements. Unlike conventional loans that require mortgage insurance if you put less than 20% down, MIP is required on all FHA loans, regardless of your down payment. There's also an upfront fee, which buyers need to factor into their budgets. In addition, MIP often can't be canceled -- even after reaching 20% equity in your home -- unless you've put down a down payment of 10% or more, in which case you can cancel after 11 years.

Current mortgage and refinance rates

We use information collected by Bankrate, which is owned by the same parent company as CNET, to track daily mortgage rate trends. The above table summarizes the average rates offered by lenders across the country.

FAQs

More mortgage tools and resources

You can use CNET's mortgage calculator to help you determine how much house you can afford. The CNET mortgage calculator factors in variables such as the size of your down payment, home price and interest rate to help you figure out the amount of a mortgage within your financial means. Using the CNET mortgage calculator can also help you understand how much of a difference even a slight increase in rates makes in how much interest you'll pay over the life of your loan.