For the average person who doesn’t have the means to purchase a home otherwise, one might have to get an FHA loan, more commonly known as a mortgage on the house you wish to purchase. There are many private lenders out there, and because of the stiff competition in the market, there is no standard rate for borrowers. You might approach five different lenders at any given time, and they might all give you different interest rates on your loan.

There are many different factors that private lenders consider when deciding interest rates. One depends on the current state of the economy and what standard interest rates look like when you apply for a loan. The other factors they consider are your qualifications as a borrower and the risk level for them to loan you the money. They evaluate your finances, credit, and more individual factors to make their decision. So, while you may get an FHA loan at 4.0 percent, another person with worse credit or less money in the bank might receive a similar loan a week later at 4.25 percent.

With all this in mind, you might be wondering how to get the lowest interest rate on your FHA loan possible. Let’s break it down and look at a few factors private lenders consider when determining your FHA loan rate.

Bank Funds Rate -

FHA loans and their interest rates are highly contingent on the state of the economy and the federal funds rate, which is the rate banks can borrow money from one another and the Federal Reserve. When the economy is at a low point, the rate at which banks can borrow money is typically lower as a means to stimulate the economy.

The federal funds rate is also impacted by the United States Treasury Bond’s current rate, which currently has a negative yield, which means the bonds have negative interest rates. FHA loan interest rates are also affected by mortgage-backed securities. 

Consider this the standard rate all private lenders use when deciding what interest rates to charge their borrowers. If you’re looking to be a savvy and knowledgeable borrower, go to trusted financial websites such as Freddie Mac which has the current funds rate and other essential information about the state of our economy. When you know this basic federal rate, you’ll have more knowledge when researching various lenders’ baseline rates they promote on their websites.

Your Borrower Profile -

There are some things you can’t control, like the state of the U.S. economy. One thing you can control, however, is the various aspects of your borrow profile, and you can even do some research to find the optimal time to apply for your FHA loan. These key factors can help you save some money and get a lower interest rate on your FHA loan.

Here are some critical pieces of your borrower profile lenders consider when deciding your FHA loan rate:

Your Credit Score – People with credit scores over 760 often get the most competitive current FHA loan rates. They are considered less risky as they have good standing with lenders they have existing relationships with. The most significant factor contributing to your credit score is your payment history. Paying all of your credit card bills on time, for example, contributes to a positive credit score. However, if you’ve neglected to pay multiple credit card bills or are consistently late on payments, that would affect your score negatively.

Another often overlooked factor contributing to your credit score is how much you utilize your credit limits. Your credit score is negatively impacted if you consistently use close to or all of the maximum amounts of the credit lines extended to you. For example, it doesn't look good if your credit card has a spending limit of $5,000 a month, and you often come close to maxing out that limit. Lenders feel much more comfortable knowing that their potential borrowers are not utilizing the maximum amount of their existing loans and are more likely to provide lower interest rates to those who don’t.

Your Debt-to-Income Ratio – Your debt-to-income ratio is determined by dividing your after-tax income by your monthly debt payments. You will likely get a lower interest rate on your FHA loan if your DTI ratio is lower than 36 percent. If it’s above that percentage, paying off some of your debt might be beneficial before applying for an FHA loan. If you are close to or within a few months of paying off a significant debt like a student loan, the lender may not include this payment when calculating your DTI.

The Points You Can Pay in Advance – An option you may have when applying for an FHA loan is paying more of your loan interest upfront, also known as paying for points. One point equals one percent of interest. If your credit score isn’t great, a lender may ask you to pay for points and doing so can help lower your interest rate.

The Number of Years for Your Loan Term – 30-year loan terms are the most common timeframe for FHA loans. The longer loan term is better for the banks because the more payments you make on your home, the more interest they make. If you can make the higher monthly payments that go with a shorter loan timeframe, like a 20-year loan, you will benefit by paying less interest over the loan. Though this doesn’t help you get the lower interest rate upfront, it does help you save a large amount of money on your mortgage in the long run.

The answer to getting a lower interest rate is to know the bank funds rate, research lenders’ websites, improve your borrow profile by working on your credit score, and consider paying for points. Consider a shorter-term loan to save on interest costs over your loan’s timeframe too.