When you’re buying a house, you have more to consider than just which property to purchase. You’ll need to understand the mortgage process, including if and when you should apply for a rate lock.
Let’s explore what a mortgage rate lock is, how it can protect you from fluctuating interest rates and how Pennymac’s mortgage rate lock program offers added benefits to homebuyers.
What Is a Mortgage Rate Lock?
A rate lock, also called a locked-in rate and rate protection, is a guarantee from a mortgage lender to give you a set interest rate (often the current market rate) when you apply for a mortgage. It guarantees a specific interest rate for a period of time, allowing you to close on a property without worrying about the mortgage rate changing.
When you lock in an interest rate, you are locking in pricing for that day. For example, if you lock in a 30-year fixed rate but then decide you want to do a 20-year term instead, you would still be able to take advantage of the interest for the day you locked.
If you don’t secure your interest rate through a rate lock, increasing rates might necessitate a larger down payment or require you to pay points at closing to stay within your desired monthly mortgage payment budget.
What Is a Float-Down Loan Option?
While locking a rate can protect you from future rate increases during the underwriting and loan processing period, there is a chance the rate could also drop. A mortgage rate lock float-down enables you to lock in a rate during the underwriting period and have it reduced if market interest rates fall.
To protect yourself, whether rates go up or down, consider a lender that offers a rate lock with a float-down option. For example, Pennymac’s Lock & Shop program allows Pennymac customers to lock their rate for up to 90 days. It differs from a typical rate lock since you lock in the rate while shopping for a house—with the intention that you’ll find one in the next 60 days or so—and lock the rate once you go under contract.
A BuyerReady Certification is Pennymac’s unique loan certification process that can tell you the mortgage amount you could qualify for. It’s a great first step in your home-buying journey. Not only will you get as close to a mortgage as possible without actually finalizing it, but it qualifies you for Lock & Shop, which provides additional security and flexibility as you go through the underwriting process. You can lock in your rate before you get into contract with a seller, potentially saving you thousands of dollars in the lifetime cost of your new mortgage.
When Should You Lock Your Mortgage Rate?
Most people lock their mortgage rate after they’ve signed a purchase agreement for their home or when they begin the refinance process. But ultimately, it’s difficult to advise when you should lock your mortgage rate as rates can fluctuate on an hourly and daily basis, and the mortgage rate you’ll receive depends on your credit score and other factors.
Nobody can predict when mortgage rates will rise or fall. The best you can do to ensure a competitive rate is to research the recent history of mortgage rates in your area, determine if mortgage rates are rising or falling and lock in the rate as soon as you feel ready.
Don’t hesitate to ask a Loan Expert for advice — they are a great information resource.
Why Mortgage Rates Fluctuate
Numerous economic factors contribute to mortgage rate fluctuation, such as inflation, the rate of economic growth, housing market conditions and the Federal Reserve monetary policy. The Federal Reserve is responsible for determining federal funds rates. This target interest rate helps determine how expensive it is for banks to borrow money from other banks. The higher the federal funds rate, the more banks must charge in mortgage rates to recoup their expenses.
How Long Is a Mortgage Rate Lock Good For?
Rate locks last for a set period of time. Generally, you have the option of a 30-, 45- or 60-day period. Extended periods are possible — with Pennymac Lock & Shop, you have up to 90 days.* Once your rate lock period expires, the originally agreed-upon interest rate is no longer guaranteed. You’ll need a rate lock extension to maintain it, but this comes at an additional cost that increases with the length of the extension. However, Pennymac will cover the extension cost if the lock expires due to a delay on our end.
Considerations on Selecting the Right Rate Lock Time Period
When deciding how long to lock your rate, it is important to select a duration long enough to cover your close of escrow date. It might be a good idea to ask your lender about their average times to help ensure you’ve picked a period of adequate length.
The Benefits of a Mortgage Rate Lock
The paperwork and processing involved when buying or refinancing a house often takes several weeks. Because interest rates can fluctuate daily, the rate available when you start the mortgage process will probably be a little different than the rate available when your mortgage is finalized.
Since mortgages involve large amounts of money and are paid over extended periods of time, even slight fluctuations can quickly amount to thousands of dollars. By locking in your mortgage rate, you protect yourself from the possibility of paying higher amounts should mortgage rates rise.
The Downsides of a Mortgage Rate Lock
While a rate lock has many advantages, it also comes with a risk. The most significant is that if interest rates fall during the lock period, you can’t take advantage of the lower rate. On the flip side, if interest rates rise, they are shielded from a higher rate environment.
To ensure that you’ll continue to benefit from favorable market conditions even after committing to a rate, consider using a lender that offers a float-down option on purchase loans, such as Pennymac’s Lock and Shop.
The Process of Locking in Your Mortgage Rate
The actual rate-locking method will vary by lender, so make sure you talk to your loan officer about how to do a lock. If your loan officer doesn’t mention a rate lock, you should ask for one when you’re ready to lock. While you have hopefully already done your homework when selecting your lender and locking in your rate, now is a good time to check about available rate lock periods and whether there is a rate lock fee. At Pennymac, you can start the Lock & Shop rate lock process with float-down provision after becoming BuyerReady Certified.
It’s also important to know that rate lock terms can be impacted if the information provided on your application changes, such as the property appraisal, your credit score, income or employment or if there is a revision to the loan itself, such as length or type of mortgage.
Is a Rate Lock Right for Me?
Rates are constantly fluctuating, similar to how the stock market moves up and down. The rate fluctuations that can happen during the loan underwriting and processing time period may seem small, but those changes can be enough to cost you or save you thousands of dollars over the life of your mortgage. Obtaining a mortgage rate lock with a float-down option provides peace of mind. If rates increase, you’ll be protected; if they decrease, you can take advantage of the lower rate.
Pennymac can help you prepare for your home-buying journey with confidence. Get BuyerReady Certified to understand how much you can borrow, then protect yourself from future rate increases before you get into contract with Lock & Shop. Have more questions about rate locks or mortgages? Contact a Pennymac Loan Expert today.
*Lock & Shop Program allows consumers who have a Pennymac BuyerReady Certification for a purchase loan with Pennymac to lock a rate prior to locating a property. The program requires a non-refundable fee of $595 due at the time of the rate lock. Consumers with a Pennymac BuyerReady Certification for a purchase loan with Pennymac must meet appropriate underwriting conditions to obtain a mortgage loan. Consumers may choose between a 60-day, 75-day or 90-day lock period. Consumers must initiate a mortgage loan application for a specific property and be under purchase contract for the property at least 30 days prior to lock expiration in order to extend the locked rate. All rate lock extensions are subject to Pennymac’s standard rate lock extension fees. After the rate lock and subject to favorable market conditions, consumers may be eligible for a one-time reduction in rate once the loan application for a specific property has been initiated (0.50 % maximum reduction in interest rate allowed). Eligible loan products are Conventional Fixed, Conventional ARM, FHA Fixed and VA Fixed. Program excludes Jumbo, refinance, third-party and in-process loans. Program subject to termination in Pennymac’s sole discretion and without notice.
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A home equity loan allows you to borrow a lump sum against your home’s equity, usually at a fixed interest rate that’s lower than other forms of consumer debt.
The amount you can borrow with a home equity loan is based on the current market value of your home, the size of your mortgage and personal financials like your credit score and income.
Home equity loans are best used for five-figure renovation or repair projects — which can garner you a tax deduction on their interest — or to consolidate other debts.
Home equity loans drawbacks include putting your home at risk of foreclosure and their lengthy application process.
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What is a home equity loan?
A home equity loan is a type of second mortgage secured by the equity in your home. It offers a set amount at a fixed interest rate, so it’s best for borrowers who know exactly how much money they need. You’ll receive the funds in a lump sum, then make regular monthly repayments amortized over the term of the loan, typically as long as 30 years.
Because your home is the collateral for the loan, the amount you’ll be able to borrow is related to its current market value. The interest rate you receive on a home equity loan (as with other loans) will vary depending on your lender, credit score, income and other factors.
Home equity loans in 2024
While the housing sales have cooled in some areas in recent months due to higher mortgage rates, housing prices have continued to post gains – good news for the net worth of American homeowners. According to the Board of Governors of the Federal Reserve System, U.S. households possess a collective $32.6 trillion in home equity as of the third quarter of 2023.
That’s a record high, and it means that the vast majority of homeowners are sitting on a huge pile of equity that they can leverage to access cash, including through a home equity loan. In fact, according to TransUnion’s latest “Home Equity Trends Report,”, the median amount of tappable equity per homeowner is $254,000, and some householders are in an even better position: 5.8 million of them have more than $1 million of available equity.
2023 saw a reversal in the demand for tapping all that equity. As rates jumped, the number of borrowers interested in home equity loans – along with HELOCs, their line-of-credit cousins – dropped in the back half of last year. TransUnion’s data shows that HELOC originations in the third quarter of 2023 fell by 28 percent versus the year before. Home equity loans were only down by 3 percent, though – perhaps a reflection of a homeowner’s confidence in the predictability of a fixed-rate home equity loan versus the volatility of variable-rate HELOC (more on that below).
10.16%
The average $30,000 HELOC rate as of the beginning of January 2024 — up from 7.62% in January 2023.
Source:
Bankrate national survey of lenders
As for 2024: The potential for Federal Reserve interest rate cuts could be good news for home equity loans. While the forecast doesn’t call for massive savings — for HE loans, anyway — any reduction in borrowing costs saves prospective borrowers some cash, and encourages them to turn to this financing tool.
What are average home equity loan interest rates?
As of late January 2024, home equity loan rates for the benchmark $30,000 loan are averaging just under 9 percent, within a tight range of 8.5 to 10 percent. While high compared to their average of six percent in 2022, that’s significantly lower than other forms of consumer debt. Credit card rates are lingering above the 20-percent mark, and personal loans can stretch into the 25–35 percent range for borrowers with less-than-perfect credit scores.
How does a home equity loan work?
When you take out a home equity loan, the lender approves you for a loan amount based on the percentage of equity you have in your home and other factors. You’ll receive the loan proceeds in a lump sum, then repay what you borrowed in fixed monthly installments that include principal and interest over a set period. Although terms vary, home equity loans can be repaid over a period as long as 30 years.
Since the loan is secured by your home, the property is at risk for foreclosure if you can’t repay what you borrowed. If that happens, it can cause serious damage to your credit score, making it harder for you to qualify for future loans.
You can use the funds from a home equity loan for any purpose, but there’s a possible tax benefit if you use the money to improve your home. You can deduct the interest (up to the limit) if the home equity loan is used to “buy, build or substantially improve” the property. To do this, you’ll need to itemize your deductions.
Home equity loan requirements
Lenders have different requirements for home equity loans, but generally, the standards include:
Credit score: Mid-600s or higher
Home equity: At least 20 percent
Employment and income: At least two years of employment history and pay stubs from the past 30 days
Debt-to-income (DTI) ratio: No more than 43 percent
Loan-to-value (LTV) ratio: No more than 80 percent
What should you use a home equity loan for?
Some of the best reasons to use a home equity loan include:
Upgrading your home: Whether you’re looking to remodel your kitchen, add an in-law suite or install solar shingles on your roof, a home equity loan can be a smart way to pay for the enhancements. You’ll be improving your home, which means you get to enjoy living there more; and when you’re ready to sell, the upgrade can potentially make it more attractive (and more valuable) to buyers. Plus, you can qualify for some tax benefits — a deduction on the interest — when you use a loan to invest in the property in this way.
Consolidating high-interest debt: If you’ve been struggling to pay off debts with high costs like credit cards, a home equity loan can make a big difference in the amount of interest you’re paying. However, if you’re considering this route, there are two important caveats. First, you need to have a real commitment to not build those credit card balances up again. Second, the amount of debt needs to be fairly significant. Credit card balance transfers can be a better option if you’re aiming to pay off less than $10,000.
Covering large medical bills: Health care can be incredibly expensive, and medical problems often arise unexpectedly. If you or a family member needs a procedure, treatment or long-term care that isn’t fully covered by insurance, a home equity loan could be a good way to handle the costs.
When you should avoid getting a home equity loan
If you’re thinking about using a home equity loan and any of these describe you, think again:
Covering discretionary spending: You don’t have to go on that pricey vacation for spring break (find something fun to do for a staycation). You also don’t have to host a wedding (go to the courthouse). While both of those kinds of big expenses can be fun, they are not reasons to hock your home. Save for longer, or find a more affordable way to make them happen.
Paying for college: You may find lenders who advocate paying college tuition via home equity, but this is a risky move. There is no guarantee that your child is going to graduate, but there is certainly a guarantee that you need to have a home. Look at taking out federal student loans in your child’s name instead: Their interest rates are lower, and they come with benefits like income-based repayment options.
Paying for a relatively small project: If you only need a small amount of cash – think less than $20,000 – you may be better off looking for other options such as a credit card with a long zero-percent APR period or simply taking longer to set aside some savings.
How much can I borrow with a home equity loan?
To figure out how much you might be able to borrow with a home equity loan, you first need to understand how much home equity you actually have. Your equity is the essentially difference between how much your home is worth and how much you owe on your first mortgage. For example, if your home’s current fair market value is $500,000 and you owe $250,000, you have a 50 percent equity stake.
Most lenders will let you borrow up to 80 percent of your equity stake (some let you go as high as 85 or even 90 percent). However, there’s another factor to consider: How much all your loans amount to or your combined loan-to-value ratio (CLTV). Most home equity lenders will cap your total amount of home-secured debt – including your first mortgage – at 80 percent of the home’s market value. So, in that case, you would likely be able to borrow up to $150,000, taking your total mortgage debt to $400,000 (80 percent of $500,000). Bankrate’s home equity calculator can help you estimate your exact borrowing power.
Home equity loan pros and cons
Pros of home equity loans
Attractive interest rates: Home equity lenders typically charge lower interest rates compared to the rates on personal loans and credit cards. This is because home equity loans are a type of secured debt, meaning they’re backed by some sort of collateral (in this case, your house) — which makes them less risky for the lender, compared to unsecured debt, which isn’t backed by anything.
Fixed monthly payments: Home equity loans offer the stability of a fixed interest rate and a fixed monthly payment. This might make it easier for you to budget for and pay each month. This also eliminates the possibility of getting hit with a higher payment with a variable-rate product, like a credit card or home equity line of credit (HELOC).
Tax advantages: You could be eligible for a tax deduction if you use the loan proceeds to substantially improve or repair the home. Check with an accountant or tax professional to learn more about this deduction and to determine if it’s available to you.
Cons of home equity loans
Home on the line: Your home is the collateral for a home equity loan, so if you can’t repay it, your lender could foreclose.
No flexibility: If you’re not sure how much money you need to borrow (you’re planning a big remodeling project, say), a home equity loan might not be the best choice. Because home equity loans only offer a fixed lump sum, you run the risk of borrowing too little. On the flip side, you might borrow too much, which you’ll still need to repay with interest (though you might be able to settle the debt early, if that’s the case).
Lengthy, costly application: Applying for a home equity loan is akin to applying for a mortgage; though somewhat simpler, it often means lots of paperwork, a long process and closing costs.
What’s the difference between a home equity loan and a HELOC?
A HELOC – short for home equity line of credit – is also secured by the equity in your home and has similar requirements to a home equity loan, it operates a bit differently. With a HELOC, you can borrow money on an as-needed basis, up to a set limit, typically over a 10-year draw period. During that time, you’ll make interest-only payments on what you borrow. This means that your payments may be smaller than a home equity loan, which includes both interest and principal. When the draw period on the HELOC ends, you’ll repay what you borrowed and any interest, usually over a repayment term of up to 20 years. Unlike home equity loans, HELOCs have variable interest rates, which means your monthly payments can change.
Other home equity loan alternatives
A home equity loan and a HELOC aren’t your only options for borrowing against your equity. Some other alternatives include:
Shared equity agreements: Investment companies like Unlock and Hometap offer shared equity agreements, which let homeowners access cash now in exchange for a portion of the home’s value in the future. These arrangements vary, but they all have one upside: You don’t have to make monthly payments, because the money is technically not a loan, but an investment — funds in exchange for a share in your home. However, they all have the same downside: You’re going to make a big payment eventually, and it will likely wind up coming out of the proceeds when you sell the home.
Cash-out refinance: Another option to convert a portion of your home equity into ready money is through a cash-out refi. Unlike a home equity loan, a cash-out refi replaces your current mortgage with a new one for a higher amount, with you taking the difference between the outstanding balance and the new balance in cash. You’ll need to think carefully about a cash-out refi based on the rate attached to your current mortgage. If you managed to lock in a super-low rate during the pandemic, a cash-out refinance is almost certain to lock you into a significantly higher rate.
Personal loans: Personal loans can be a cost-effective route if your credit score is in 760-and-above territory. These are unsecured loans – meaning you won’t have to put your house on the line. However, borrowing limits tend to be lower, and the repayment period will be shorter than most home equity loans’.
Home equity loans FAQ
Taking on any form of debt, including a home equity loan, has an impact on your credit score. After you close on a home equity loan, your score might decrease temporarily. Over time, as you continue to make timely payments on the loan, you might see your score improve, as well.
It varies by lender, but most home equity loans come with repayment periods between five years and 30 years. A longer loan term means you’ll get more affordable monthly payments. That said, you’ll also pay far more in interest. If you can afford the higher monthly payments, selecting a shorter term maximizes overall cost. The ideal is to find a compromise between the two: the maximum manageable payments and the shortest loan term.
Fees for home equity loans vary by lender, which makes it very important to compare offers. Some home equity lenders require you to pay an origination fee and other closing costs, typically between 2 percent and 5 percent of the loan balance. You might also pay a home appraisal fee. Once the loan proceeds are disbursed to you, late fees could apply if you remit payment after the monthly due date or grace period (if applicable).
There are no restrictions on how you purpose your home equity loan. The most common uses include debt consolidation for high-interest credit card balances or other loans; home repairs or upgrades; higher education expenses and medical debts. Some choose to use the funds to start a business, purchase an investment property or cover another major purchase.
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A personal loan enables you to borrow a lump sum of money and repay it in fixed installments. While personal loans can be a useful tool, there are important factors to consider before taking one out.
According to recent statistics, millions of Americans have personal loan debt, with the average loan amount being $16,931. Personal loans can be used for various reasons, whether for debt consolidation, medical expenses, or home improvements. But how do you know if a personal loan is right for you?
Everyone’s financial situation is unique, so be sure to understand what to know about personal loans before you determine if it’s the best way to go. Here are seven things you should know before taking out a personal loan.
1. How Personal Loans Work
A personal loan allows you to borrow money and repay it in fixed installments. You can get a personal loan from banks, credit unions, or online lenders. Once you choose a lender, you’ll need to submit a formal application. When filling out the application, you’ll likely need to include identification such as your Social Security card, your address, and proof of income.
If your application is approved by the lender, you will receive a lump sum of money that you will repay in monthly payments plus interest.
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2. Debt Consolidation Isn’t for Everyone
With increasing amounts of credit card debt, personal loans are becoming increasingly popular. Although personal loans are a common solution for debt consolidation, that doesn’t mean it’s right for you. Here are a few indicators that debt consolidation through a personal loan is not the best solution, and you’d be better off seeking debt counseling or another financial avenue:
With your current financial pace, you’ll pay off your debt in less than a year. If this is the case, debt consolidation likely will not be worth it.
You can’t afford the monthly payment. You don’t want to be stuck with an additional payment you can’t afford. This could lead to late payments or, worse, loan default.
You will pay more interest and fees with a personal loan compared to your existing debt. You don’t want to take out a personal loan if it will cost you more money in the long run.
Your spending isn’t under control, and you might rack up more debt after you pay off your existing debt. There’s no point in taking out a personal loan to consolidate your debt if it will just tempt you to accumulate more debt on paid-off credit cards.
Your credit score isn’t good enough for an acceptable interest rate. You might want to take the time to improve your credit before applying for a personal loan.
Consider these statements and compare current debt costs to the costs of a personal loan to determine if debt consolidation is the best option. Also, note that not all personal loan providers are the best for debt consolidation. Some lenders specialize in debt consolidation, whereas others don’t have good enough offerings to make debt consolidation with their loans worth it.
3. The Difference Between Secured and Unsecured Loans
Most personal loans are unsecured loans. This means you do not have to offer any collateral to receive the loan. Types of collateral include owned property, a house, or a car—anything the lender can use to pay back the money owed if you default on the loan.
However, not all personal loans are unsecured, and some lenders offer secured loans that require collateral. For example, if you have little to no credit or a poor credit score, lenders may only offer you a secured loan because your credit report isn’t a good enough indicator that you will repay the loan. If you don’t mind putting up collateral and intend to pay back the loan in full, secured loans don’t have to be bad.
4. Compare APRs Before Selecting a Lender
The annual percentage rate (APR) combines the personal loan interest rate and any additional loan fees, and it fluctuates based on the personal loan provider. APRs typically range between around 5% and 36%, and this is partly determined by your credit history.
Popular personal loan providers, such as Best Egg and Achieve, are known for low APRs, especially if you have above-average credit. However, if you have a good credit score and a loan provider is still requiring a high APR, you might want to consider looking into other options for a better APR. A bad APR could cost you hundreds of unnecessary dollars over the course of the loan.
5. The Impact of a Hard Inquiry on Your Credit Score
A hard inquiry is when a lender or creditor pulls your credit for the purpose of offering you a loan. This will ding your credit a minimal amount. The hard inquiry will remain on your credit report for up to two years, but it will likely stop affecting your score after one year. Plus, if you repay your loan on time and take care of your credit in the meantime, your credit will bounce back.
It’s also important to note that you should keep your loan shopping within a specific time frame. In other words, only apply for personal loans for two weeks to 45 days at the most. If it takes any longer, you might receive multiple dings on your credit report rather than just one.
6. The Max Loan Offer May Not Be the Best Option
Personal loans can range between $2,000 to $50,000, and some lenders, such as SoFi, offer as much as $100,000 loans. With that in mind, you may qualify for a large amount, but that doesn’t necessarily mean you should take the highest offer. Consult your finances and budget before deciding what personal loan amount to accept, because if you accept one for more money than you can afford, you will likely regret this.
Check Your Credit Score Before Applying
Most personal loan providers require at least a 640 credit score. However, some companies, such as Achieve and Upstart, offer loans to 620 credit scores and up. If you make your personal loan payments on time and responsibly handle your other credit responsibilities, a personal loan can improve your credit in the long run and immensely help your credit card utilization rate if you choose to use it for debt consolidation.
Before you determine if a personal loan is right for you, pull your credit first. With Credit.com, you can check your credit score for free.
There’s no one-size-fits-all mortgage. When deciding between a conventional loan vs FHA loan, you’ll have to compare costs and benefits based on your personal finances.
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A conventional loan is often better if you have good or excellent credit because your mortgage rate and PMI costs will go down. But an FHA loan can be perfect if your credit score is in the high-500s or low-600s. For lower-credit borrowers, FHA is often the cheaper option.
These are only general guidelines, though. And the choice between a conventional loan vs FHA loan might be different for you. So be sure to look closely at both loan types and choose the best one for your financial situation.
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Conventional loan vs FHA comparison
There are plenty of low-down-payment options for today’s home buyers. But many will choose either a conventional loan with 3% down or an FHA loan with 3.5% down.
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So, which type of home loan program is better? That depends on your financial situation.
Here’s an overview of what you need to know about qualifying for a conventional loan vs FHA loan.
Conventional 97 Loan
FHA Loan
Minimum Down Payment
3%
3.5%
Minimum Credit Score
620
580
Maximum Debt-to-Income Ratio
43%
50%
Loan Limit for 2024 (in most areas)
$
$
Income Limit
No income limit
No income limit
Mortgage Insurance
Annual fee
Annual and upfront fee
Down payment requirements
Both conventional and FHA mortgage programs have minimum down payment amount requirements which borrowers must meet in order to be eligible for a home loan and reach their goal of homeownership.
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FHA: 3.5% down with a 580 credit score, or 10% down a score between 500-579
Conventional 97: 3% down
Like other conventional loans, conventional 97 applicants will pay private mortgage insurance (PMI) with less than 20% down. And all FHA borrowers are required to pay mortgage insurance regardless of down payment.
Credit scores
In deciding between an FHA loan and the Conventional 97 loan, your individual credit score matters. This is because your credit score determines the type of mortgage loan you’re eligible for. Credit history affects your monthly mortgage payments, too.
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Minimum credit score requirements for FHA and conventional loans are:
FHA: 580 credit score with 3.5% down, or 500-579 credit score with 10% down
Conventional: 620 credit score
If your credit score is between 500 and 620, the FHA loan is best suited for you because it’s your only available option.
But if your credit score is above 620, it’s worth looking into a conventional loan with 3% down. Especially because, as your credit score goes up, your mortgage rate and PMI costs go down.
Debt-to-income ratio
Another factor you need to consider when choosing between a conventional and FHA loan is your debt-to-income ratio or DTI ratio. This is the amount of debt you owe on a monthly basis, compared to your monthly gross income.
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Conventional loans usually allow a maximum DTI of 43% — meaning your debts take up no more than 43% of your gross monthly income
FHA loans allow for a higher DTI of up to 50% in some cases
However, even with FHA loans, you’ll have to shop around if your debt-to-income ratio is above 45%. Because the FHA allows mortgage lenders to set their own in-house loan requirements, some may set stricter DTI requirements that are below 50%.
Debt-to-income ratios tend to make a bigger difference in high-cost areas, like big cities, where home values are high.
If you’re buying somewhere like Los Angeles, New York, or Seattle, your monthly debt (including mortgage costs) will take up much more of your income simply because real estate is so much more expensive.
Mortgage insurance
FHA and conventional loans both charge mortgage insurance. But the cost varies depending on which type of loan program you have, and how long you keep the mortgage.
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FHA mortgage insurance (MIP): The costs for MIP is the same for most borrowers: 0.55% of the loan amount per year, with a one-time upfront fee of 1.75%
Conventional loans private mortgage insurance (PMI): The costs for PMI vary depending on your credit score and loan-to-value ratio. You’ll only pay PMI when you put less than 20% down, and you’ll only continue to pay monthly premiums until you reach 20% home equity
Conventional Loans
FHA Loans
Mortgage Insurance Type
Private Mortgage Insurance (PMI)
Mortgage Insurance Premium (MIP)
Upfront Mortgage Insurance Fee
n/a
1.75% of loan amount
Annual Mortgage Insurance Rate
Up to 2.25% of loan amount
0.55% of loan amount
Duration
Until the loan reaches 80% LTV
11 years (down payment of 10% or more) OR life of the loan (down payment of 3.5% to 10%)
The cheaper mortgage insurance option for you depends on your financial situation.
Conventional 97 mortgage insurance goes away at 80% loan-to-value. You’ll also hear loan officers refer to this as 20% home equity (both terms essentially refer to the same thing).
This means that, over time, your Conventional 97 can become a better value — especially for borrowers with high credit scores.
Also, consider upfront charges.
In addition to MIP, the FHA charges an upfront mortgage insurance premium known as UFMIP. UFMIP costs 1.75% of your loan size, is added to your loan balance, and is non-recoverable except via the FHA Streamline Refinance
The Conventional 97 charges no equivalent upfront fee for mortgage insurance. It only charges monthly mortgage insurance premiums
Conventional loan vs FHA loan limits
Both the FHA and conventional loans have limits on the amount of money you can borrow.
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In 2024, the FHA loan limits for a single-family home is $ in most of the U.S.
The conventional loan limit for a single-family home is $.
Any loan amount that exceeds these limits are considered non-conforming loans or jumbo loans.
Conventional loan vs FHA mortgage rates
Mortgage rates typically look lower for FHA loans than conventional loans on paper. For instance, today’s average FHA rates are as low as % (% APR)*, while conventional mortgage rates are as low as % (% APR)*.
Compare conventional and FHA mortgage rates. Start here
However, those rates can’t be taken at face value. First, because mortgage rates vary depending on your personal finances, your rate will likely be different from the average rate.
Second, PMI and credit score can also affect your interest rate and mortgage payment. For conventional loans, a lower credit score means a higher interest rate. So if your score is in the low- to mid-600s, an FHA loan might be cheaper.
Conventional loans also base mortgage insurance rates on your credit score, which contributes to a higher monthly payment as well.
*Current rates according to The Mortgage Reports’ lender network. Rates are for sample purposes only; your own rate will be different.
Conventional loan vs FHA mortgage payments
For home buyers with good credit scores, a conventional loan may be more attractive. That’s because conventional loan costs are more dependent on your credit score and down payment than FHA loan costs. And as a result, your monthly payments and PMI are lower when your credit score is higher. This is a key difference from how FHA loans work.
Compare conventional and FHA mortgage rates. Start here
With an FHA loan, your mortgage rate and MIP cost the same no matter what your FICO score.
That means in the short term, FHA loans may be more advantageous.
But over the long-term, borrowers with above-average credit scores will typically find Conventional 97 loans more economical relative to FHA ones.
Remember, mortgage insurance for conventional loans can be canceled at 20% loan-to-value ratio. But FHA mortgage insurance lasts the entire life of the loan. The only way to bypass this requirement is if you put down at least 10% down. This way you may be able to drop FHA mortgage insurance after 11 years (assuming 20% loan-to-value).
So if you’ll be staying in the home long enough to reach 20% equity — and especially if you have a good credit score — a conventional loan could be your cheaper option in the long run.
FHA vs Conventional infographic
Alternative low-down-payment loan programs
The conventional 97 loan and FHA loan aren’t the sole options for low-down-payment mortgages. Explore a variety of other mortgage loans with low or no upfront expenses to make homeownership more accessible:
Compare your home loan options. Start here
Fannie Mae HomeReady: This home loan offers below market interest rates, reduced private mortgage insurance costs, and it allows the income of everyone living in the household to qualify. However, there are income limits, loan maximums, and you’ll need a FICO score of 620 or more and a DTI of 50% or less
Freddie Mac Home Possible: Similar to HomeReady, it has income and loan limits, and it requires a minimum credit score of 660, 3% down payment, and DTI below 43%. However, Freddie Mac Home Possible offers flexible loan approval requirements that help low-income families become homeowners
VA loan: This mortgage loan requires no down payment and offers flexible credit score minimums and below-market rates. VA loans have no maximum loan amounts. Plus, bankruptcy and foreclosure are not immediate disqualifications. Yet, this program is only available to eligible service members and veterans
USDA loan: This rural housing government-backed loan requires no down payment and has no maximum home purchase price. Although there are drawbacks. This government-agency loan does have property standards that require the home to be located in a rural area. There are also income limits for the buyer, and it does carry mortgage insurance for the entire loan term
Most of these mortgage loan products can only be used to purchase a primary residence — a home in which you live in for the majority of the year.
Vacation homes and investment properties are generally not allowed.
For many first-time homebuyers, though, the choice among low-down payment loans will be between the FHA loan and the Conventional 97. This is because VA loans are available to military borrowers only. USDA loans are restricted to suburban and rural areas, with maximum loan and income limits, and HomeReady has similar income restrictions.
Conventional loan vs FHA loan FAQ
Which is a better loan, FHA or conventional?
Between FHA and conventional, the better loan for you depends on your financial circumstances. FHA might be better than conventional if you have a credit score below 680, or higher levels of debt (up to 50 percent DTI). Conventional loans become more attractive the higher your credit score is because you can get a lower interest rate and monthly payment.
Can you switch from FHA to conventional?
You can switch from an FHA to a conventional loan by refinancing your mortgage. This means you get a new conventional loan to pay off your existing FHA loan. This might make sense to do if you have at least 20 percent equity in your home and a 620 or higher credit score. Then, you may be able to save by switching from an FHA to a conventional loan with no PMI.
What are the benefits of a conventional home loan?
If you get a conventional loan with 20 percent down or more, you won’t have to pay for mortgage insurance. That’s a big benefit over FHA loans, which require mortgage insurance regardless of your down payment size. The conventional 97 loan also lets you put just 3 percent down, while FHA requires 3.5 percent at minimum. And conventional loans offer lower mortgage rates the higher your credit score is. That’s good news if you have a good credit score of 720 or higher.
Is an FHA loan bad?
FHA loans are great for borrowers who need a home loan with a lower bar of entry. The big benefits are that they allow lower down payments (just 3.5 percent) and a lower credit score (580) than many other mortgage loans.
What are the disadvantages of FHA loans?
You have to pay for FHA mortgage insurance regardless of your down payment size. And you can’t get rid of it unless you refinance. So if you have a great credit score and/or you’re putting 20 percent or more down, an FHA loan likely isn’t the right choice for you. In that case, look into a conventional loan instead.
What credit score do I need for a conventional loan?
Conventional loans require a credit score of at least 620. But some mortgage lenders might set their own requirements, starting at 640, 660, or even higher. Plus, your conventional mortgage rate will be better the higher your credit score is. So especially if your credit is on the lower end, be sure to show around with different lenders for the best deal.
What credit score do I need for an FHA loan?
FHA loans require a credit score of 580 or higher in most cases. You might be able to get an FHA loan with a credit score of 500-580 if you make a 10 percent or bigger down payment. But you’ll have to search for the right lender because few mortgage companies allow scores in that range for FHA loans.
What’s the interest rate on a conventional loan?
Conventional loan interest rates are typically a little higher than FHA mortgage rates. That’s because FHA loans are backed by the Federal Housing Administration, which makes them less “risky” for lenders and allows for lower rates. However, if you have a great credit score (above 680, in most cases) you might qualify for a lower conventional rate. But, you also have to consider the annual mortgage insurance rate with each loan. Depending on your credit score and down payment, conventional mortgage insurance rates could be higher or lower than FHA insurance rates. This will affect which loan is cheaper overall.
Who qualifies for a conventional loan?
You might qualify for a conventional loan if you have a credit score of at least 620; a debt-to-income ratio of 43 percent or lower; a 3 percent down payment; and a steady, two-year employment history proven by tax returns and bank statements. To qualify for the low-down-payment conventional 97 loan, you must buy a single-family property (no 2-,3-, or 4-units allowed).
Which loan type has a higher credit score requirement?
Generally, conventional loans have a higher credit score requirement than FHA loans. Conventional loans may require a credit score of 620 or higher, while FHA loans may allow for a credit score as low as 500 to 580, depending on the lender.
What is mortgage insurance, and how does it differ for conventional loans and FHA loans?
Mortgage insurance is a type of insurance that protects lenders in case the borrower defaults on the loan. With a conventional loan, private mortgage insurance (PMI) is generally required if the down payment is less than 20%. With an FHA loan, mortgage insurance premiums (MIP) are required for the life of the loan.
Which loan type has more flexible underwriting requirements?
FHA loans generally have more flexible underwriting requirements compared to conventional loans. They may allow for higher debt-to-income ratios, lower credit scores, and non-traditional credit histories. Conventional loans may have stricter underwriting requirements.
Can you refinance from an FHA loan to a conventional loan?
Yes, you can refinance from an FHA loan to a conventional loan. Refinancing may help you get a lower interest rate, lower monthly payments, or eliminate mortgage insurance. However, it’s important to evaluate the potential costs, benefits, and qualification requirements before proceeding with the refinance.
Conventional loan vs FHA: The bottom line
For today’s low down payment home buyers, there are scenarios in which the FHA loan is what’s best for financing; and there are scenarios in which the Conventional 97 is the clear winner. Mortgage rates for both home loans should be reviewed and evaluated.
Ready to make a home purchase? Talk with a loan officer about your mortgage options. You should compare personalized quotes for both FHA and conventional loans to see which one is cheaper for your situation and suits your needs best.
Time to make a move? Let us find the right mortgage for you
When it comes to selecting a college, one big consideration is whether to attend a private vs. public college. A key difference between private and public colleges lies in how they are funded and operated. Public colleges get much of their funding from local and state governments, while private ones are largely sustained with tuition, fees, and donations.
Going the public route is the most common scenario. In the fall of 2023, approximately 13.5 million students attended public institutions while 5.1 million were enrolled in private institutions, according to the National Center for Education Statistics.
Students who are debating between private and public colleges may want to consider factors like cost, quality of education, campus life, and how they plan to pay for college. Read on for more information on each of these categories.
Public vs Private Colleges: Factors to Consider
Choosing a college is a personal decision, so it’s important to factor in individual goals and needs as you compare private vs. public colleges. In addition to the factors below, things like what you hope to study and how close you’d like to be to home will influence how you choose a college.
Now, let’s dig into more about potential advantages and drawbacks of public vs private colleges.
The Cost of Public vs Private Colleges
Many students wonder if they should choose a college based on price. One reason that attending public colleges is the more popular route is that they are often less expensive than private institutions. Public institutions are often especially affordable for in-state students, who typically get a break on tuition.
According to research by the College Board, the average cost of tuition and fees at a public college with in-state tuition during the 2023-2024 school year was $11,260, and $29,150 for out-of-state students. At private colleges, the average tuition and fees was $41,540.
That said, private colleges and universities may also offer scholarships, fellowships, and other kinds of need- or merit-based financial aid. And, even some top-tier universities have virtually done away with tuition for students whose families have certain levels of family income. So, high-achieving students might actually get a better or comparable deal at a private institution depending on their family’s financial situation.
Recommended: The Average Cost of College Tuition in 2023
Differences in Educational Quality
According to U.S. News, the highest ranking public schools in the country include UCLA, UC Berkeley, the University of Virginia, the University of Michigan Ann Arbor, and the University of North Carolina at Chapel Hill. At these schools and many others, students can get a top-notch education at a fair price if they qualify for in-state tuition.
However, many public schools have enormous student populations, which can mean large class sizes, difficulty getting into your most desired classes, and less personal attention from faculty and administrators. For example, the University of Central Florida has just over 59,000 undergraduates, resulting in a student-to-faculty ratio of 29 to 1.
By comparison, Pomona College in Southern California has a population of just under 1,800 students (fall 2022) and a student-to-faculty ratio of just eight students to one faculty member, according to U.S. News. Beyond class size, some private institutions are often able to deliver a world-class education. In fact, every one of the top 10 highest-ranking schools in the country are all private schools.
Specific Majors or Programs of Study Available
Private colleges, particularly smaller liberal arts colleges, may have fewer majors or programs available to students than larger public universities. As you are evaluating schools, consider the field(s) of study you are most interested in and understand the options available at the schools you are considering.
On a related note, students interested in pursuing research opportunities may have a better chance of conducting research at a larger university. However, private universities are likely conducting research, too. It’s best to consider the programs you are specifically interested in and ask an admissions counselor what research opportunities are available to undergraduates in that field or major.
Recommended: A Guide to Choosing the Right College Major
Campus Life
For some students, the large size of many public institutions is a factor in the pro column. This environment means there are a great variety of potential groups to join, activities to participate in, or classmates to become friends with.
A large school means many different classes and majors to choose from. If this appeals to you, it can expand your network and make your college experience much more interesting. Private schools are also likely to have clubs and activities available for students, too, though it may be on a smaller scale.
Both public and private schools can be a great choice for students interested in athletics. Public schools are most likely to have a wide variety of active sports teams, and most of the top-ranking colleges for student athletes are public.
However, many private universities have successful teams, as well. If it’s important to you, or you’re a student athlete yourself, you could check out the strength of specific sports programs at the colleges you’re considering.
Repay your way. Find the monthly payment & rate that fits your budget.
Financing Your Education
Some students and their families cover tuition costs (or a portion of costs) with savings, but there are a variety of other sources of finances to help students pay for college. As mentioned, public universities generally have a less expensive sticker price than private schools, but private schools may offer more financial aid to students. So, don’t rule out a private school on cost alone.
To apply for federal student aid, the first step is filling out the Free Application for Federal Student Aid (FAFSA®). Colleges will use this information to help determine how much aid, and what types, a student qualifies for. Federal aid includes things like Pell Grants for low-income students, work-study, and federal student loans. Both private and public schools may offer scholarships to students, as well.
Federal Student Loans
Federal loan options include Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS Loans.
For the 2023-2024 school year, the interest rate on Direct Subsidized or Unsubsidized loans for undergraduates is 5.50%, the rate on Direct Unsubsidized loans for graduate and professional students is 7.05%, and the rate on Direct PLUS loans for graduate students, professional students, and parents is 8.05%. The interest rates on federal student loans are fixed and are set annually by Congress.
Private Student Loans
For students who still need additional funding, a variety of lenders offer private student loans. Private student loans typically take the borrower’s credit history, and that of any cosigner, into consideration. And while federal student loan interest rates are always fixed, private student loan interest rates can be fixed or variable.
Keep in mind, though, that private student loans do not offer the same benefits as federal student loans, such as income-driven repayment plans and student loan forgiveness. If possible, it’s wise to exhaust all federal aid options before seeking private student loans.
The Takeaway
Both public and private colleges and universities can offer an excellent education to students. Differences to consider when deciding between a private or public school include the cost, the programs of study available to students, the quality of education, campus life, and sources of funding for school. Depending on individual preferences and circumstances, students may find a public school better suits their needs or vice versa.
If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.
Cover up to 100% of school-certified costs including tuition, books, supplies, room and board, and transportation with a private student loan from SoFi.
SoFi Private Student Loans Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs.
SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Stephanie Horan is a lead data analyst for the MarketWatch Guides Team, specializing in home buying and personal finance. Beginning her career in asset management and transitioning to data journalism, Stephanie is a Certified Educator of Personal Finance (CEPF®). She is passionate about translating data to provide digestible insights for a broad audience. Her studies have been featured in CNBC, Bloomberg and the New York Times, among many others.
Edited By:
Andrew Dunn
Andrew Dunn is a veteran journalist with more than a decade of experience in the business and finance arena. Before joining our team, Andrew was a reporter and editor at North Carolina news organizations including The Charlotte Observer and the StarNews in Wilmington. In those roles, his work was cited numerous times by the North Carolina Press Association and the Society of Business Editors and Writers. Andrew completed the business journalism certificate program from the University of North Carolina at Chapel Hill.
Editor’s Note: Parts of this story were auto-populated using data from Curinos, a mortgage research firm that collects data from more than 250 lenders. For more details on how we compile daily mortgage data, check out our methodology here.
Mortgage rates rose slightly in the first week of 2024, with the 30-year fixed-rate mortgage increasing by 0.10 percentage points, according to data from Curinos analyzed by MarketWatch Guides.
This slight increase took place in the midst of mixed economic signals. The Labor Department reported that employers added 216,000 jobs in December, exceeding economists’ expectations, while the stock market had a rocky start to the beginning of the year. Through last Friday, the S&P is down roughly 1% year-to-date.
Economists with the Mortgage Bankers Association are still confident that rates will fall over the coming months. The next Federal Reserve meeting is scheduled for the end of January, and though rates may be held steady at that meeting, the board previously indicated that they expect three rate cuts throughout the year.
Here are today’s average mortgage rates:
30-year fixed mortgage rate: 7.12%
15-year fixed mortgage rate: 6.41%
5/6 ARM mortgage rate: 6.87%
Jumbo mortgage rate: 7.01%
Current Mortgage Rates
Product
Rate
Last Week
Change
30-Year Fixed Rate
7.12%
7.18%
-0.06
15-Year Fixed Rate
6.41%
6.40%
+0.01
5/6 ARM
6.87%
7.00%
-0.13
7/6 ARM
7.04%
7.15%
-0.11
10/6 ARM
7.15%
7.25%
-0.10
30-Year Fixed Rate Jumbo
7.01%
7.07%
-0.06
30-Year Fixed Rate FHA
6.78%
6.87%
-0.09
30-Year Fixed Rate VA
6.78%
6.86%
-0.08
Disclaimer: The rates above are based on data from Curinos, LLC. All rate data is accurate as of Friday, January 12, 2024. Actual rates may vary.
>> View historical mortgage rate trends
Mortgage Rates for Home Purchase
30-year fixed-rate mortgages are down, -0.06
The average 30-year fixed-mortgage rate is 7.12%. Since the same time last week, the rate is down, changing -0.06 percentage points.
At the current average rate, you’ll pay $673.38 per month in principal and interest for every $100,000 you borrow. You’re paying less compared to last week when the average rate was 7.18%.
15-year fixed-rate mortgages are up, +0.01
The average rate you’ll pay for a 15-year fixed-mortgage is 6.41%, an increase of+0.01 percentage points compared to last week.
Monthly payments on a 15-year fixed-mortgage at a rate of 6.41% will cost approximately $866.17 per $100,000 borrowed. With the rate of 6.40% last week, you would’ve paid $865.62 per month.
5/6 adjustable-rate mortgages are down,-0.13
The average rate on a 5/6 adjustable rate mortgage is 6.87%, a decrease of-0.13 percentage points over the last seven days.
Adjustable-rate mortgages, commonly referred to as ARMs, are mortgages with a fixed interest rate for a set period of time followed by a rate that adjusts on a regular basis. With a 5/6 ARM, the rate is fixed for the first 5 years and then adjusts every six months over the next 25 years.
Monthly payments on a 5/6 ARM at a rate of 6.87% will cost approximately $656.59 per $100,000 borrowed over the first 5 years of the loan.
Jumbo loan interest rates are down, -0.06
The average jumbo mortgage rate today is 7.01%, a decrease of-0.06 percentage points over the past week.
Jumbo loans are mortgages that exceed loan limits set by the Federal Housing Finance Agency (FHFA) and funding criteria of Freddie Mac and Fannie Mae. This generally means that the amount of money borrowed is higher than $726,200.
Product
Monthly P&I per $100,000
Last Week
Change
30-Year Fixed Rate
$673.38
$677.43
-$4.05
15-Year Fixed Rate
$866.17
$865.62
+$0.55
5/6 ARM
$656.59
$665.30
-$8.71
7/6 ARM
$667.99
$675.41
-$7.42
10/6 ARM
$675.41
$682.18
-$6.77
30-Year Fixed Rate Jumbo
$665.97
$670.01
-$4.04
30-Year Fixed Rate FHA
$650.59
$656.59
-$6.00
30-Year Fixed Rate VA
$650.59
$655.93
-$5.34
Note: Monthly payments on adjustable-rate mortgages are shown for the first five, seven and 10 years of the loan, respectively.
Factors That Affect Your Mortgage Rate
Mortgage rates change frequently based on the economic environment. Inflation, the federal funds rate, housing market conditions and other factors all play into how rates move from week-to-week and month-to-month.
But outside of macroeconomic trends, several other factors specific to the borrower will affect the mortgage interest rate. They include:
Financial situation: Mortgage lenders use past financial decisions of borrowers as a way to evaluate the risk of loaning money.
Loan amount and structure: The amount of money that bank or mortgage lender loans and its structure (including both the term and whether its a fixed-rate or adjustable-rate).
Location: Mortgage rates vary by where you are buying a home. Areas with more lenders, and thus more competition, may have lower rates. Foreclosure laws can also impact a lender’s risk, affecting rates.
Whether borrowers are first-time homebuyers: Oftentimes first-time homebuyer programs will offer new homeowners lower rates.
Lenders: Banks, credit unions and online lenders all may offer slightly different rates depending on their internal determination.
How To Shop for the Best Mortgage Rate
Comparison shopping for a mortgage can be overwhelming, but it’s shown to be worth the effort. Homeowners may be able to save between $600 and $1,200 annually by shopping around for the best rate, researchers found in a recent study by Freddie Mac. That’s why we put together steps on how to shop for the best mortgage rate.
1. Check credit scores and credit reports
A borrower’s credit situation will likely determine the type of mortgage they can pursue, as well as their rate. Conventional loans are typically only offered to borrowers with a credit score of 620 or higher, while FHA loans may be the best option for borrowers with a FICO score between 500 and 619. Additionally, individuals with higher credit scores are more likely to be offered a lower mortgage interest rate.
Mortgage lenders often review scores from the three major credit bureaus: Equifax, Experian and TransUnion. By viewing your scores ahead of lenders considering you for a loan, you can check for errors and even work to improve your score by paying down balances and limiting new credit cards and loans.
2. Know the options
There are four standard mortgage programs: conventional, FHA, VA and USDA. To get the best mortgage rate and increase your odds of approval, it’s important for potential borrowers to do their research and apply for the mortgage program that best fits their financial situation.
The table below describes each program, highlighting minimum credit score and down payment requirements.
Though conventional mortgages are most common, borrowers will also need to consider their repayment plan and term. Rates can be either fixed or adjustable and terms can range from 10 to 30 years, though most homeowners opt for a 15- or 30-year mortgage.
3. Compare quotes across multiple lenders
Shopping around for a mortgage goes beyond comparing rates online. We recommend reaching out to lenders directly to see the “real” rate as figures listed online may not be representative of a borrower’s particular situation. While most experts recommend getting quotes from three to five lenders, there is no limit on the number of mortgage companies you can apply with. In many cases, lenders will allow borrowers to prequalify for a mortgage and receive a tentative loan offer with no impact to their credit score.
After gathering your loan documents – including proof of income, assets and credit – borrowers may also apply for pre-approval. Pre-approval will let them know where they stand with lenders and may also improve negotiating power with home sellers.
4. Review loan estimates
To fully understand which lender is offering the cheapest loan overall, take a look at the loan estimate provided by each lender. A loan estimate will list not only the mortgage rate, but also a borrower’s annual percentage rate (APR), which includes the interest rate and other lender fees such as closing costs and discount points.
By comparing loan estimates across lenders, borrowers can see the full breakdown of their possible costs. One lender may offer lower interest rates, but higher fees and vice versa. Looking at the loan’s APR can give you a good apples-to-apples comparison between lenders that takes into account both rates and fees.
5. Consider negotiating with lenders on rates
Mortgage lenders want to do business. This means that borrowers may use competing offers as leverage to adjust fees and interest rates. Many lenders may not lower their offered rate by much, but even a few basis points may save borrowers more than they might think in the long run. For instance, the difference between 6.8% and 7.0% on a 30-year, fixed-rate $100,000 mortgage is roughly $5,000 over the life of the loan.
Expert Forecasts for Mortgage Rates
With mortgage interest rates climbing steadily throughout the first half of 2023 and exceeding 7%, prospective homeowners may be wondering: Will there be any relief going forward? Some experts are optimistic.
Fannie Mae and the Mortgage Bankers Association (MBA) project that rates will fall going into 2024 and throughout next year. In fact, the MBA predicts that rates will end 2024 at 6.1%.
More Mortgage Resources
Methodology
Every weekday, MarketWatch Guides provides readers with the latest rates on 11 different types of mortgages. Data for these daily averages comes from Curinos, LLC, a leading provider of mortgage research that collects data from more than 250 lenders. For more details on how we compile daily mortgage data, check out our comprehensive methodology here.
Editor’s Note: Before making significant financial decisions, consider reviewing your options with someone you trust, such as a financial adviser, credit counselor or financial professional, since every person’s situation and needs are different.
Stephanie Horan is a lead data analyst for the MarketWatch Guides Team, specializing in home buying and personal finance. Beginning her career in asset management and transitioning to data journalism, Stephanie is a Certified Educator of Personal Finance (CEPF®). She is passionate about translating data to provide digestible insights for a broad audience. Her studies have been featured in CNBC, Bloomberg and the New York Times, among many others.
Edited By:
Andrew Dunn
Andrew Dunn is a veteran journalist with more than a decade of experience in the business and finance arena. Before joining our team, Andrew was a reporter and editor at North Carolina news organizations including The Charlotte Observer and the StarNews in Wilmington. In those roles, his work was cited numerous times by the North Carolina Press Association and the Society of Business Editors and Writers. Andrew completed the business journalism certificate program from the University of North Carolina at Chapel Hill.
Editor’s Note: Parts of this story were auto-populated using data from Curinos, a mortgage research firm that collects data from more than 250 lenders. For more details on how we compile daily mortgage data, check out our methodology here.
Mortgage rates rose slightly in the first week of 2024, with the 30-year fixed-rate mortgage increasing by 0.10 percentage points, according to data from Curinos analyzed by MarketWatch Guides.
This slight increase took place in the midst of mixed economic signals. The Labor Department reported that employers added 216,000 jobs in December, exceeding economists’ expectations, while the stock market had a rocky start to the beginning of the year. Through last Friday, the S&P is down roughly 1% year-to-date.
Economists with the Mortgage Bankers Association are still confident that rates will fall over the coming months. The next Federal Reserve meeting is scheduled for the end of January, and though rates may be held steady at that meeting, the board previously indicated that they expect three rate cuts throughout the year.
Here are today’s average mortgage rates:
30-year fixed mortgage rate: 7.18%
15-year fixed mortgage rate: 6.41%
5/6 ARM mortgage rate: 6.90%
Jumbo mortgage rate: 7.03%
Current Mortgage Rates
Product
Rate
Last Week
Change
30-Year Fixed Rate
7.18%
7.19%
-0.01
15-Year Fixed Rate
6.41%
6.38%
+0.03
5/6 ARM
6.90%
6.94%
-0.04
7/6 ARM
7.11%
7.11%
0.00
10/6 ARM
7.19%
7.19%
0.00
30-Year Fixed Rate Jumbo
7.03%
7.08%
-0.05
30-Year Fixed Rate FHA
6.84%
6.90%
-0.06
30-Year Fixed Rate VA
6.85%
6.87%
-0.02
Disclaimer: The rates above are based on data from Curinos, LLC. All rate data is accurate as of Wednesday, January 10, 2024. Actual rates may vary.
>> View historical mortgage rate trends
Mortgage Rates for Home Purchase
30-year fixed-rate mortgages are down, -0.01
The average 30-year fixed-mortgage rate is 7.18%. Since the same time last week, the rate is down, changing -0.01 percentage points.
At the current average rate, you’ll pay $677.43 per month in principal and interest for every $100,000 you borrow. You’re paying less compared to last week when the average rate was 7.19%.
15-year fixed-rate mortgages are up, +0.03
The average rate you’ll pay for a 15-year fixed-mortgage is 6.41%, an increase of+0.03 percentage points compared to last week.
Monthly payments on a 15-year fixed-mortgage at a rate of 6.41% will cost approximately $866.17 per $100,000 borrowed. With the rate of 6.38% last week, you would’ve paid $864.52 per month.
5/6 adjustable-rate mortgages are down,-0.04
The average rate on a 5/6 adjustable rate mortgage is 6.90%, a decrease of-0.04 percentage points over the last seven days.
Adjustable-rate mortgages, commonly referred to as ARMs, are mortgages with a fixed interest rate for a set period of time followed by a rate that adjusts on a regular basis. With a 5/6 ARM, the rate is fixed for the first 5 years and then adjusts every six months over the next 25 years.
Monthly payments on a 5/6 ARM at a rate of 6.90% will cost approximately $658.60 per $100,000 borrowed over the first 5 years of the loan.
Jumbo loan interest rates are down, -0.05
The average jumbo mortgage rate today is 7.03%, a decrease of-0.05 percentage points over the past week.
Jumbo loans are mortgages that exceed loan limits set by the Federal Housing Finance Agency (FHFA) and funding criteria of Freddie Mac and Fannie Mae. This generally means that the amount of money borrowed is higher than $726,200.
Product
Monthly P&I per $100,000
Last Week
Change
30-Year Fixed Rate
$677.43
$678.11
-$0.68
15-Year Fixed Rate
$866.17
$864.52
+$1.65
5/6 ARM
$658.60
$661.28
-$2.68
7/6 ARM
$672.71
$672.71
$0.00
10/6 ARM
$678.11
$678.11
$0.00
30-Year Fixed Rate Jumbo
$667.32
$670.68
-$3.36
30-Year Fixed Rate FHA
$654.59
$658.60
-$4.01
30-Year Fixed Rate VA
$655.26
$656.59
-$1.33
Note: Monthly payments on adjustable-rate mortgages are shown for the first five, seven and 10 years of the loan, respectively.
Factors That Affect Your Mortgage Rate
Mortgage rates change frequently based on the economic environment. Inflation, the federal funds rate, housing market conditions and other factors all play into how rates move from week-to-week and month-to-month.
But outside of macroeconomic trends, several other factors specific to the borrower will affect the mortgage interest rate. They include:
Financial situation: Mortgage lenders use past financial decisions of borrowers as a way to evaluate the risk of loaning money.
Loan amount and structure: The amount of money that bank or mortgage lender loans and its structure (including both the term and whether its a fixed-rate or adjustable-rate).
Location: Mortgage rates vary by where you are buying a home. Areas with more lenders, and thus more competition, may have lower rates. Foreclosure laws can also impact a lender’s risk, affecting rates.
Whether borrowers are first-time homebuyers: Oftentimes first-time homebuyer programs will offer new homeowners lower rates.
Lenders: Banks, credit unions and online lenders all may offer slightly different rates depending on their internal determination.
How To Shop for the Best Mortgage Rate
Comparison shopping for a mortgage can be overwhelming, but it’s shown to be worth the effort. Homeowners may be able to save between $600 and $1,200 annually by shopping around for the best rate, researchers found in a recent study by Freddie Mac. That’s why we put together steps on how to shop for the best mortgage rate.
1. Check credit scores and credit reports
A borrower’s credit situation will likely determine the type of mortgage they can pursue, as well as their rate. Conventional loans are typically only offered to borrowers with a credit score of 620 or higher, while FHA loans may be the best option for borrowers with a FICO score between 500 and 619. Additionally, individuals with higher credit scores are more likely to be offered a lower mortgage interest rate.
Mortgage lenders often review scores from the three major credit bureaus: Equifax, Experian and TransUnion. By viewing your scores ahead of lenders considering you for a loan, you can check for errors and even work to improve your score by paying down balances and limiting new credit cards and loans.
2. Know the options
There are four standard mortgage programs: conventional, FHA, VA and USDA. To get the best mortgage rate and increase your odds of approval, it’s important for potential borrowers to do their research and apply for the mortgage program that best fits their financial situation.
The table below describes each program, highlighting minimum credit score and down payment requirements.
Though conventional mortgages are most common, borrowers will also need to consider their repayment plan and term. Rates can be either fixed or adjustable and terms can range from 10 to 30 years, though most homeowners opt for a 15- or 30-year mortgage.
3. Compare quotes across multiple lenders
Shopping around for a mortgage goes beyond comparing rates online. We recommend reaching out to lenders directly to see the “real” rate as figures listed online may not be representative of a borrower’s particular situation. While most experts recommend getting quotes from three to five lenders, there is no limit on the number of mortgage companies you can apply with. In many cases, lenders will allow borrowers to prequalify for a mortgage and receive a tentative loan offer with no impact to their credit score.
After gathering your loan documents – including proof of income, assets and credit – borrowers may also apply for pre-approval. Pre-approval will let them know where they stand with lenders and may also improve negotiating power with home sellers.
4. Review loan estimates
To fully understand which lender is offering the cheapest loan overall, take a look at the loan estimate provided by each lender. A loan estimate will list not only the mortgage rate, but also a borrower’s annual percentage rate (APR), which includes the interest rate and other lender fees such as closing costs and discount points.
By comparing loan estimates across lenders, borrowers can see the full breakdown of their possible costs. One lender may offer lower interest rates, but higher fees and vice versa. Looking at the loan’s APR can give you a good apples-to-apples comparison between lenders that takes into account both rates and fees.
5. Consider negotiating with lenders on rates
Mortgage lenders want to do business. This means that borrowers may use competing offers as leverage to adjust fees and interest rates. Many lenders may not lower their offered rate by much, but even a few basis points may save borrowers more than they might think in the long run. For instance, the difference between 6.8% and 7.0% on a 30-year, fixed-rate $100,000 mortgage is roughly $5,000 over the life of the loan.
Expert Forecasts for Mortgage Rates
With mortgage interest rates climbing steadily throughout the first half of 2023 and exceeding 7%, prospective homeowners may be wondering: Will there be any relief going forward? Some experts are optimistic.
Fannie Mae and the Mortgage Bankers Association (MBA) project that rates will fall going into 2024 and throughout next year. In fact, the MBA predicts that rates will end 2024 at 6.1%.
More Mortgage Resources
Methodology
Every weekday, MarketWatch Guides provides readers with the latest rates on 11 different types of mortgages. Data for these daily averages comes from Curinos, LLC, a leading provider of mortgage research that collects data from more than 250 lenders. For more details on how we compile daily mortgage data, check out our comprehensive methodology here.
Editor’s Note: Before making significant financial decisions, consider reviewing your options with someone you trust, such as a financial adviser, credit counselor or financial professional, since every person’s situation and needs are different.
Personal loan amounts range from $2,000 to $100,000, which may not be enough to buy a regular home but could work if you need a small mortgage for a tiny or mobile home.
Personal loan interest isn’t tax deductible like a mortgage.
You can typically receive faster funding with a personal loan than a mortgage.
With median home sale prices approaching $400,000 at the end of 2023, a personal loan typically won’t give you the borrowing power you need to buy a home compared to a regular mortgage, However, if you’re in the market for a tiny home or a manufactured home, a personal loan may be a great financing choice. If not, a personal loan can help you tidy up your finances so you can qualify for a mortgage to buy your dream home.
Can you use a personal loan to buy a house?
Yes, if you can find a home at a price within standard personal loan amount limits (typically between $2,000 and $100,000) and can afford the payment timeline. That’s probably not enough to buy a regular home, but it may be perfect if you need a small mortgage for a tiny home or a mobile home.
Using a personal loan to buy a tiny home
Personal loans may be the right financing fit to buy tiny homes with prices averaging between $30,000 and $70,000. Mortgage lenders often shy away from loans below $100,000 because they aren’t profitable. In other cases, tiny homes don’t fit minimum property requirements. For example, tiny homes are typically less than 400 square feet, which is less than the Federal Housing Administration’s minimum.
Personal loans are typically unsecured, which means you won’t risk losing your home if you can’t make the payments. One disadvantage of a loan versus a mortgage is you can’t write off personal loan interest because it’s not tax-deductible like mortgage interest.
Using a personal loan to finance a manufactured home
On average, you’ll pay between $86,100 and $158,633 to buy a manufactured home, which means you could use a personal loan to buy one on the lower end of the price range. If you don’t plan to attach your home to land that you own, you may not be able to get mortgage financing, which makes personal loans a good option.
A personal loan may also be cheaper than a chattel loan, an expensive type of financing used to buy mobile homes that aren’t considered real estate.
6 ways you can use a personal loan to buy a house
If you’re buying a standard family home, you can use a personal loan to spruce up your finances to help you qualify for a home loan.
If you’re saddled with multiple credit card payments at high interest rates, you can use a personal loan for debt consolidation to combine them all into one monthly payment. Rates are typically lower than credit cards, and you’ll reduce your credit utilization ratio, which has a major impact on your credit score.
If your scores improve, lower monthly payments could help you qualify for a higher sales price or a better interest rate. Having fewer monthly payments reduces the chances of a late payment, which can really damage your credit score.
You’ll need a credit score of 780 or higher to get the best mortgage interest rates with the lowest closing costs. You could see a big boost to your credit score if you pay off maxed-out credit cards with a debt consolidation loan.
Besides allowing you to qualify for a higher-priced house, a lower interest rate can save you thousands of dollars in interest charges over the life of a 30-year mortgage.
If you took out an auto loan with a short term (12 to 36 months) to buy a new car, the payment will affect your debt-to-income (DTI) ratio, which measures how much total debt you have compared to your income. The higher your DTI ratio, the lower the mortgage amount you can qualify for.
If you’ve found your forever home but have been told your mortgage DTI ratio is too high, consider replacing your short-term auto loan with a longer-term personal loan. Keep in mind that you’ll end up paying more in interest if you choose a longer loan term than the loan you’re paying off.
If you don’t have enough saved up for a down payment for a house, consider putting the savings from steps one and two above into a down payment savings account. The more you put down, the lower your monthly mortgage payment will be. If you can swing a 20% down payment, you’ll avoid monthly mortgage insurance on a conventional mortgage.
Mortgage underwriting guidelines don’t allow you to use money from an unsecured loan like a credit card or personal loan toward your down payment or closing cost requirement to buy a home. However, there is an exception if your loan is secured to an asset like a car.
Mortgage lenders will allow you to use funds from a secured personal loan to qualify if you meet the DTI ratio requirements with the new payment. You’ll also need to provide paperwork to prove you own the asset and document the value of the asset with some third-party service (like Kelly Blue Book for a car loan).
If you’re trying to buy a home in a competitive market, your agent may recommend an all-cash offer, which may involve bidding more than the asking price on the home. If you’re short of funds to make an offer and need a quick path to extra cash, a personal loan may be worth a look.
Many personal loan lenders can get you cash within a day or two, which keeps you in the running against other cash buyers. If you want to pay the personal loan off once you’ve purchased the home, you borrow the funds against your home’s equity with a home equity loan, HELOC or a cash-out refinance.
Pros and cons of using a personal loan to buy a house
Pros
Replace multiple debts with one easy-to-remember monthly payment.
Improve your credit scores by paying off revolving credit card debt.
No assets are required for collateral.
Faster funding times than most mortgage products.
Can use debt consolidation savings to build a down payment fund.
Cons
Payment may affect your DTI ratio.
Rates are often higher than home equity loan and HELOC rates.
Shorter terms mean higher monthly payments than home equity products.
Potential prepayment penalties and high origination fees.
Personal loan interest isn’t tax-deductible for a home purchase.
Can you use a personal loan for a down payment?
The answer is a definite no if it’s an unsecured personal loan. However, as mentioned above, if the personal loan is secured by an asset like a car, collectible, artwork or other asset, then lenders will usually allow the borrowed funds to count toward your down payment. You’ll need to qualify with the extra payment and prove you own the secured asset.
Investing in real estate is some of the oldest and most reliable financial advice in the books. Few other assets can compete with real estate’s vast array of benefits. These benefits include tax advantages, appreciation, relative impunity to market shifts, and even the potential for passive income.
But even if you have every intention of investing in real estate, it can be challenging to get started. After all, even a modest home usually requires a substantial down payment. And it can take years to save up those five-figure sums. The term “real estate investor” may bring to mind a multi-millionaire who manages several properties, leaving you feeling overwhelmed enough to give up the ghost entirely.
Fortunately, it is possible to invest in real estate with little or no money, even if you aren’t swimming in discretionary income. For instance, with an Opportunity Fund or REIT (Real Estate Investment Trust) you can get your foot in the door even if you can’t afford to purchase an entire property. There are also a host of ways to leverage your own home. These include house hacking, renting vacation space on Airbnb, and more.
In this post, we’ll break down everything you need to know about how to invest in real estate. We’ll go over some of the most common types of real estate investing. We’ll also break down how they can help you make money. And we’ll explain how you can begin, no matter how much capital you have in hand.
Why Invest in Real Estate?
Before we dig into the meat of the post, let’s take a moment to backtrack. Why is real estate investing such a well-worn piece of financial advice?
You’ve probably heard that diversifying your portfolio of real estate investments is essential. But your “portfolio” doesn’t just have to live on the stock market! Real estate investing gives you, as the name suggests, a real, tangible asset. And it’s much less vulnerable to the capriciousness of the market.
Real estate investing can help you not only build home equity but also generate passive cash flow. Both through the process of appreciation and the more intentional, hands-on approaches we’ll study further below. And owning your own home can help you reap financial benefits while simultaneously providing for one of your most basic needs.
How to Invest in Real Estate with Little Money
When a down payment might cost as much as $60,000, it’s understandable that many first-time property shoppers feel overwhelmed. They say you have to spend money to make money. Yes, but that’s quite a hefty figure for the average American earner.
To be sure, some real estate investment strategies require a good deal of cash upfront to be workable. But there are other tactics that don’t necessitate such a large lump sum to begin with. This means you don’t have to be a real estate mogul to be a property owner. We’ll break down various strategies at both ends of the spectrum below.
Types of Real Estate Investing
Let’s get into the nitty-gritty. What types of real estate can you invest in?
There are three main types of investment properties available to real estate investors.
Residential properties are probably the ones you’re most familiar with. They are exactly what they sound like: buildings used by individuals and families as residential living spaces. These properties include single-family homes, duplexes, apartments, condominiums, and townhouses, and multi-family homes (so long as they’re being used residentially and don’t exceed four units).
Commercial real estate are properties used to conduct business. They may include offices, storefronts, retail spaces, farmland, and large multi-family houses or apartment buildings.
Industrial real estate are properties that serve industrial business purposes, such as factories, power plants, or storage and shipping warehouses.
Furthermore, there are both active and passive forms of real estate investing.
Active investing is, well, active. It requires a good deal of time, energy, and commitment from the investor. Active investing may become a part- or even full-time job for the investor. They usually share ownership with few (or no) other people and thus bears a lot of responsibility for the success of the investment.
Passive investing, on the other hand, allows the investor to reap the benefits of investing without taking on the pressure and responsibility of full ownership of a tangible property. In most cases, passive investing involves supplying capital to a larger investment pool. You earn capital gains on loan interest through dividends paid to shareholders.
We’ll go into it all of this in more detail, including specific ways you can invest in real estate, both active and passive.
How Real Estate Investing Can Help You Earn
Before we break down the specific ways you can get started investing in real estate, let’s talk about how it can help you make money. (After all, that’s the whole point!)
You can invest in real estate in several ways, depending on what type of investing you’re participating in.
Equity and appreciation
Purchasing real estate equips the owner with a “hard asset”; the tangible property or building. Owning this kind of asset confers equity, or value. It isn’t as vulnerable to the fluctuations of the market as stocks, bonds, and other securities. Furthermore, property has a longstanding history of increasing in value over time, or appreciating.
On the contrary, other types of purchases (like automobiles) depreciate, or lose value. Thus, purchasing a property may allow you to earn income passively simply through the process of appreciation. It more or less ensures that the cash value of your home is a safe and stable part of your overall net worth.
Rental income
Chances are, you’ve had to pay rent to a landlord at some point in your life. Well, if you become the landlord, someone’s paying you the rent. And as long as that rental price eclipses your total expenses, including your mortgage and maintenance costs, the rest is profit!
Aside from managing the investment property, you can also collect rental income by sharing your space on platforms like Airbnb or house hacking, which we’ll explain below.
Sale profit
This happens when you buy a home with the intention to fix it up and sell it down the line (also known as “house flipping”.) It’s the difference between your sale cost and your purchase cost (minus all the expenses put into maintenance and improvements) is pure profit.
Loan interest
The interest charged on home and property loans can increase the value of real estate investments made through REITs, investment platforms, and private equity firms.
Ways to Invest in Real Estate
Now we know a bit about the different types of properties available to investors and how those real estate investments stand to help you earn cash.
So, what are the specific ways to go about real estate investing? There are several in both the “active” and “passive” categories.
Active:
House flipping, or rehabbing, is when an investor purchases a property with the sole intent of fixing it up to sell it later on.
Wholesaling is similar to flipping houses, but less work intensive. Wholesaling occurs when an investor purchases a property they believe is underpriced, so they can quickly sell it to another investor at a profit.
Rental properties give investors a long-term way to draw profit from their investments, though they do require lots of hands-on management and maintenance over time.
Airbnb, Vrbo, and other vacation rentals can often be listed for substantial per-night prices. They can be especially lucrative in high-demand travel destinations.
Passive:
Private equity funds pool the assets of many investors, which creates a larger, more powerful investment fund. These funds are usually overseen and allocated by a dedicated manager. They may have high minimum investment thresholds and requirements to join.
Opportunity funds also pool investors’ assets, but with the specific purpose of making investments in qualified Opportunity Zones. These are low-income, up-and-coming communities that would benefit from private investments and economic development.
REITs are companies that invest in commercial properties. Private investors can purchase shares of the company and earn income on capital gains in the form of dividends.
Online REIT platforms can make real estate investing accessible to beginning investors, often carrying no net worth or accreditation restrictions. They may allow you to invest in specific properties or in pre-built, diversified portfolios of real estate.
We’re going to break down these different investment options in even more detail below. But first, let’s start a bit closer to home—literally.
Starting with Your Own Home
One of the most straightforward ways to invest in real estate is probably already on your financial to-do list, anyway: purchasing your own home.
Purchasing a home of your own allows you to kill two birds with one stone. You’re taking care of the basic need of shelter, while also leveraging the purchase to reap a host of financial benefits.
Here are just a few ways that owning a home can help you save and earn money.
Build equity: As discussed above, property ownership confers relatively immutable equity to the purchaser—that is, your home is a fairly safe, tangible asset to add to your overall investment portfolio.
Receive tax benefits: Certain homeowners’ expenses, including real estate taxes and home mortgage interest, are tax-deductible. And if you sell your home, you may exclude up to $250,000 of capital gains (or $500,000 if filing jointly) from your taxes.
Take advantage of appreciation: Even accounting for the 2008 crisis, the cost of homes and other properties have steadily increased over time for the past 50 years. So, the home you purchase today will likely be worth more than the price you paid for it in the future.
Stop paying rent: Although you’ll likely still have a mortgage payment and other expenses to cover as a homeowner, you won’t be paying rent to live in another person’s property. It’s a cost that is essentially entirely wasted, since you aren’t building home equity in the rental property.
Keep the value of your home improvements: When you own a home of your own, any improvements you make will add to the property’s total value, beefing up your asset as well as beautifying your living space.
House Hacking
Another way to make money by purchasing your own home is known as “house hacking“. It’s a real estate investment strategy wherein you leverage rental income from your primary residence to live there cost-free.
The term was originally coined by entrepreneur and author Brandon Turner, who wrote “The Book on Investing in Real Estate with No (and Low) Money Down” and “The Book on Rental Property Investing.”
House hacking may be done, for example, by purchasing a duplex. The investor rents out one unit at a price that covers the mortgage cost while living in the second unit. Some homeowners have also used space-share platforms like Airbnb to offset their housing costs in the same manner.
Real estate investors can use this strategy to pay off the property and even create a profit margin. This will eventually allow them to invest in more rental properties. Thus, house hacking is a great way to combine the personal financial benefits of homeownership with the long-term earning potential of other types of property investment.
Buying a Home Without a Huge Down Payment
Given the recent trends in the housing market, you may feel daunted by the prospect of becoming a homeowner. In 2023, the U.S. housing market experienced significant challenges, with home prices rising to near-record highs.
But there are many incentives and programs designed to make this large investment more feasible for first-time home buyers.
FHA (Federal Housing Administration) Loans may allow borrowers to purchase a home with a down payment as small as 3.5% of the purchase price and with credit scores as low as 580. (You may also be approved for an FHA loan with a lower credit score, but your minimum down payment may be higher.)
The USDA also offers low-cost loans to low- and moderate-income households purchasing homes in qualified rural areas.
Down Payment Assistance Programs offered by local governments and private firms can provide grants, loans, and educational materials to prospective home buyers
Many other financial institutions and organizations also have special incentives for those purchasing their first homes or low-income families in the housing market. Make sure you check with your local housing authority to learn more about what’s available in your area.
Active Investment Opportunities
Want to get hands-on? Here are the details on some of the most popular and accessible active real estate investment opportunities.
House Flipping
If you’ve ever watched more than thirty minutes of HGTV, chances are you’re at least passingly familiar with the idea of flipping houses. It’s basically where you purchase a home with the express intent of fixing it up and selling it (at a higher cost) later.
House flipping is a great way for investors to earn a significant profit. However, they do need to know how to complete the flip successfully without incurring too many costs. Expenses can quickly eat into the investment’s return.
Finding a Home to Flip
House flippers have to be able to recognize a home that may be slightly undervalued but would be able to sell well given the proper upgrades. This involves both an understanding of the area’s desirability and the types of improvements that generate increased home value.
House flippers are responsible for the entire cost of the home purchase. They must also pay for all the upgrades, which they may either do themselves or hire out to professionals.
Either way, flipping houses incurs a hefty up-front cost, and it does come at a risk. Even after you make all the improvements, it’s possible that the house will languish on the market.
This can mean racking up maintenance, taxes, and other expenses for the real estate investor. However, a properly executed, short-term flip can create a substantial profit margin in a relatively small period of time.
Wholesaling
Like house flippers, wholesalers purchase homes with the intent of selling them quickly. But, they aren’t planning to do any heavy lifting along the way.
Instead, wholesalers find properties that are undervalued for their market. They scoop them up and resell them to other investors at a price closer to their true value. Thus, earning the difference as a profit.
Rental Properties
While managing rental properties may seem like a straightforward and reliable way to earn income, it’s one of the most work-intensive approaches on this list. It does require enough up-front capital to purchase the property (or properties) in the first place. However, landlords do stand to see substantial and steady returns in exchange for the work and effort they put into their properties.
After purchasing a viable property, which needs to be well-maintained, in a desirable location, and well-advertised, landlords are responsible for filling that property with qualified tenants. This can involve a time-consuming and labor-intensive screening process.
After all, as a landlord, you’re giving your renters the keys to your investment—literally! It can be a very risky move if you don’t take the time to ensure your tenants are well-qualified.
Finding & Qualifying Tenants
Along with running a standard background check, landlords may also conduct interviews with and request credit reports from prospective renters, all of which takes time. And don’t forget: every month your rental property is unfilled is a waste of potential income.
Once you do find qualified tenants, you’ll be responsible for a host of obligations unless you hire a property management company. You’ll need to provide maintenance and repairs. You’ll also need to stay on top of rent collection and record-keeping. It can quickly become unwieldy once you have several properties.
You’ll also need to be sure you’re in compliance with all the renters’ rights that exist in your jurisdiction, including laws that regulate the eviction process. Of course, you’ll need to put in the work to find good renters and a well-maintained property in the first place. When done so, managing rentals can provide a smooth and steady source of income for relatively little active work.
Seller Financing
Want to buy an investment property with no money down? Look into seller financing or a land contract. This is where the seller acts as the bank. You make your mortgage payments, including interest, to the seller.
After a few years or so, you will have enough equity in the home to get a bank loan. You can then make a lump sum payment to the seller.
Private & Hard Money Lenders
Private money lenders generally charge between 6% to 12% on the money borrowed. Hard money lenders usually charge 10% to 18%. Hard money loans are not from banks. They are from individuals or businesses aimed at financing real estate investments for a return on their money.
Hard money loans are used by investors who don’t qualify for conventional financing. They are typically used to fund renovations. Once the house is finished or has some equity in it, the borrower then refinances to a conventional mortgage with a lower interest rate.
Airbnb, Vacation Rentals, and Space Sharing
Managing a traditional property, wherein renters sign a multi-month lease, is not the only way to make money from an investment property. Platforms like Airbnb have revolutionized the real estate market. They allow homeowners (and sometimes even renters) to make money by renting out their space on a temporary, per-night basis as a vacation rental.
What’s more, you don’t necessarily have to rent out an entire home or unit to participate. A private room, or even a couch in a shared living room, is acceptable for some travelers using these services.
Airbnb and other vacation rental platforms make it simple for a novice renter. You don’t need to have a huge amount of know-how to start earning money this way. In fact, you don’t even necessarily have to “invest” in any property at all. Some landlords may allow their renters to list their housing on Airbnb as a sublet.
Airbnb Laws
However, as this new form of investment property has expanded, it’s created housing crunches in some cities. It’s resulting in “Airbnb laws,” or short-term rental legislation. These laws may limit your ability to use your housing in this way.
Always check your local regulations before you list your space on Airbnb or another of these types of platforms. If you don’t own the space, ensure that short-term sublets are allowed. Check your lease or ask your landlord directly.
Real Estate Investing Groups and Passive Investing
You may have noticed that many of the active real estate investment opportunities listed above do require substantial upfront capital to get started. You can’t wholesale or flip a house if you can’t purchase the house in the first place!
Furthermore, these active strategies generally involve a high level of skill, effort, and responsibility. It may not be feasible for those committed to other full-time careers.
Fortunately, there are still other ways to get involved with real estate investing, even if you don’t want to own or manage tangible property. (Or if doing so is out of financial reach for you right now). These passive investment tactics can help you glean the benefits of real estate investing without taking on quite as much of a fiscal and physical burden.
Private Equity Funds
A private equity, or PE fund, pools contributions from various investors to make larger investments. They’re often limited liability partnerships. That means there are fixed periods during which investors do not have access to their holdings.
Instead, PE funds allow investors to earn gains on debt and equity assets passively, without putting in much active work or research. Asset allocation and investments are managed by a dedicated individual or group. They earn money through annual fees as well as profit sharing.
PE funds come in various types, including the following:
Core equity funds generally invest in established commercial properties. They don’t carry risks like needing major improvements or experiencing losses for lack of consumer demand. The core strategy is simultaneously the least risky among PE funds and, typically, the least gainful.
Core plus equity funds generally follow the core strategy, but take a few more risks on properties that may require minor upgrades. This leads to a higher risk-return ratio on average.
Value added equity funds may invest in commercial properties that require substantial upgrades or new management to operate at their full potential. They may also seek to sell the property after improvements are made to create an additional profit margin.
Opportunistic equity funds offer the highest potential rewards, along with the highest risk. Investment properties purchased via these funds may need new construction or even land acquisitions. The payoff of such a new business venture is all but guaranteed. Furthermore, these developments take time, which means your investment capital may be tied up for longer. However, when they pay off, opportunistic equity funds see some of the best returns of the bunch.
Although PE funds are powerful real estate investment engines, they do often have high minimum investment requirements, generally not less than $100,000. Some funds may also be limited to accredited or institutional investors who can demonstrate available means.
Opportunity Funds
Opportunity funds operate on a similar model to private equity funds but are specifically used to make investments in qualified Opportunity Zones. These are economically distressed areas designated by the state and certified by the Secretary of the U.S. Treasury. Opportunity funds are legally required to invest 90% of their assets into properties in these Opportunity Zones.
Because these areas tend to be up-and-coming (and because tax benefits can incentivize investors to support them), opportunity funds often see substantial capital gains for their investors. And taxes incurred on those gains can be deferred until December 26, 2026.
That means the longer the investment is held before that date, the lower your overall tax liability will be. And opportunity fund investments held for at least ten years prior can expect their capital returns to be permanently excluded from capital gains taxes.
Of course, this strategy requires parting with your investment capital for a significant period of time. It’s best for those who can afford to put down the money to play the long game. If you can, however, investing in one is a great way to see substantial returns for almost zero effort.
Real Estate Investment Trusts (REITs)
A real estate investment trust(REIT) is a company that invests in commercial properties. As an investor, you purchase shares of this company just as you would any other. You earn income through its debt and equity assets in the form of shareholder dividends.
REITs operate similarly to mutual funds. They provide an excellent way for the average earner to experience the benefits of real estate investing. You don’t have to have a huge amount of capital to get started, as minimum investment requirements may be quite low.
However, they may carry high investment fees, especially in the case of private REITs (i.e., those not publicly traded on the stock market). Fees at these companies may run as high as 15%. REITs may also be illiquid and keep your money locked up for longer periods of time.
Online Real Estate Investment Platforms
In this digital, all-sharing-all-the-time age, most of us have already heard of crowdfunding. Real estate investments are no exception to the rules of the new millennium.
Online real estate investment platforms have begun springing up. They can make real estate gains achievable for average investors who may not have the towering net worth or accreditation status necessary to buy into more formal funds. Depending on the specific company, you might be able to choose specific investment properties to fund or buy into a diversified portfolio of investments.
Fees and minimum investment requirements are relatively low on real estate crowdfunding platforms. For instance, Fundrise lets you get started with just $500. That is much less than you’d have to pay to get in on most types of active investments! Check out our full review of Fundrise here.
Ready to Get Started Investing in Real Estate?
As you can see, there are several ways to start investing without saving up a five- or six-figure sum. And if you do it right, your investments can actually help you reach those high savings goals. You can then fund other types of investment projects!
However, as with any financial objective, planning and strategizing is key. Saving up as much capital as possible will help you get the best return on your investment once you’re ready.
You can’t allocate your assets without first keeping track of them, and to achieve that, you need to create a budget. If you’re in debt, aggressively paying it off will free you of a weighty financial anchor, so check out these powerful debt relief options.
Finally, if you intend to purchase property either to live in or as an investment opportunity, your credit score matters. It’s as simple as that. If your credit score isn’t quite where you want it to be, take these steps to raise it. Doing so will allow you to get the best interest rate once you’re ready to make the big purchase.
FHA loans have been making homeownership more accessible for decades. Tailored to borrowers with lower credit, the FHA makes it possible to buy a house with a credit score of just 580 and only 3.5% down.
But home buyers aren’t the only ones who can benefit. For current homeowners, an FHA refinance may let you access low rates and home equity, even without great credit.
Not sure whether you’ll qualify for a mortgage? Check out the FHA program. You might be surprised.
Verify your FHA loan eligibility. Start here
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>Related: How to buy a house with $0 down: First-time home buyer
What is an FHA loan?
An FHA loan is a mortgage insured by the Federal Housing Administration (FHA).
FHA insurance protects mortgage lenders, allowing them to offer loans with low interest rates, easier credit requirements, and low down payments (starting at just 3.5%).
Thanks to their flexibility and low rates, FHA loans are especially popular with first-time home buyers, home shoppers with low or moderate incomes, and/or lower-credit home buyers.
But FHA financing isn’t limited to a certain type of buyer — anyone can apply.
Verify your FHA loan eligibility. Start here
How does an FHA loan work?
The first thing to know about FHA mortgages is that the Federal Housing Administration doesn’t actually lend you the money. You get an FHA mortgage loan from an FHA-approved bank or lender, just like you would any other type of home mortgage loan.
The FHA’s role is to insure these mortgages, offering lenders protection in case borrowers can’t pay their loans back. In turn, this lets mortgage lenders offer FHA loans with lower interest rates and looser standards for qualifying.
The one catch — if you want to call it that — is that you pay for the FHA insurance that protects your mortgage lender. This is called “mortgage insurance premium” or MIP for the life of the loan or until the FHA home loan is refinanced into another type of mortgage. We go over this in detail below.
Types of FHA loans
FHA loans offer various options to meet different home buying needs. These government-backed loans are designed to make homeownership more accessible, especially for those with less-than-perfect credit scores or limited savings.
Each type of FHA loan is tailored to different financial situations and home buying needs. Here’s what you can expect.
Compare FHA loan quotes from multiple lenders. Start here
FHA mortgage loan
An FHA mortgage is ideal for first-time home buyers, requiring a minimum credit score of 580 for a 3.5% down payment. Those with credit scores between 500 and 579 can still qualify for a 10% down payment. These loans are popular due to their lenient credit score requirements and low-down payment options.
FHA rate-and-term refinance
An FHA refinance loan is suited for borrowers looking to improve their loan terms or lower interest rates, especially if their credit scores have improved since obtaining their original mortgage. It offers a way to adjust loan terms to better fit current financial situations.
FHA Streamline Refinance
For current FHA loan holders, the FHA Streamline Refinance provides an efficient way to refinance with minimal documentation and underwriting. It often results in lower interest rates and can potentially reduce mortgage insurance premiums. This option is advantageous for those who want to refinance without a complicated process.
FHA cash-out refinance
An FHA cash-out refinance allows homeowners to tap into their home equity, converting it into cash. It requires a minimum credit score of 620, and borrowers must leave at least 15% equity in their home after the refinance. It’s suitable for those needing extra funds for expenses or investments.
FHA Home Equity Conversion Mortgage (HECM)
HECM is a reverse mortgage for homeowners aged 62 and older, allowing the conversion of home equity into cash. It provides financial flexibility for seniors by enabling access to their home equity without selling the home.
FHA 203(k) loan
The FHA 203(k) loan is designed for home purchases requiring renovations. It combines the cost of the home and renovation expenses into one loan. Borrowers must meet specific credit score requirements and ensure that renovations are completed within six months.
FHA Energy Efficient Mortgage
This loan type allows borrowers to include energy-efficient upgrades in their FHA loan. It’s aimed at reducing utility costs and increasing the home’s environmental friendliness, thereby potentially increasing its value.
Section 245(a) loan
The Section 245(a) program is for borrowers expecting an increase in their income. It offers a graduated payment schedule that starts low and increases over time, aligning with anticipated income growth. This loan is particularly beneficial for young professionals expecting career advancement.
Check your FHA loan eligibility. Start here
FHA loan requirements
Homeownership can be a liberating experience, especially for first-time buyers. With their flexible guidelines and government backing, FHA home loans provide a welcoming path.
Understanding FHA loan requirements can make the process much easier, opening the door to a future in your ideal home.
Check your FHA loan eligibility. Start here
To be eligible for an FHA loan, applicants must adhere to specific guidelines:
The property must undergo a home appraisal by an FHA-approved appraiser.
The property must serve as the applicant’s primary residence; investment properties and second homes are not eligible.
Occupancy of the property is required within two months following the closing.
A mandatory inspection is conducted to ensure the property meets FHA’s basic standards.
There are a few more specific conditions to qualify, such as a down payment amount, mortgage insurance, credit score, loan limits, and income requirements.
FHA loan down payment requirements
FHA loans require a minimum down payment, which varies based on credit score. For credit scores of 580 and above, a minimum down payment of 3.5% is required. Borrowers with credit scores between 500 and 579 must make a 10% down payment.
FHA mortgage insurance premiums
FHA mortgage insurance premium (MIP) is what makes the FHA program possible. Without the MIP, FHA-approved lenders would have little reason to make FHA-insured loans.
There are two kinds of MIP required for an FHA loan. One is paid as a lump sum when you close the loan, and the other is an annual premium, which becomes less expensive each year as you pay off the loan balance:
Upfront Mortgage Insurance Premium (UFMIP) = 1.75% of the loan amount for current FHA loans and refinances
Annual Mortgage Insurance Premium (MIP) = 0.85% of the loan amount for most FHA loans and refinances
MIP is split into monthly payments that are included in your mortgage payment. You’ll have to pay FHA insurance for the life of the loan or if you refinance into another type of mortgage loan.
The good news is that, as a homeowner or home buyer, your FHA loan’s MIP rates have dropped. Today’s FHA MIP costs are now as much as 50 basis points (0.50%) lower per year than they were in previous years.
Also, you have ways to reduce what you’ll owe in FHA MIP.
Depending on your down payment and loan term, you can reduce the length of your mortgage insurance to 11 years instead of the entire loan.
Loan term
Original down payment
MIP duration
20, 25, 30 years
Less than 10%
Life of loan
20, 25, 30 years
More than 10%
11 years
15 years or less
Less than 10%
Life of loan
15 years or less
More than 10%
11 years
Or, you could refinance out of FHA MIP at a later date.
With FHA interest rates as competitive as they are today, refinancing could reduce your monthly mortgage payments and cancel your mortgage insurance premium if you have enough equity in the home.
Check your FHA loan rates. Start here
FHA loan credit score minimums
The minimum credit score requirement for an FHA loan is 500. However, a score of 580 or higher allows for a lower down payment. Credit scores directly impact loan terms and down payment amounts.
Debt-to-income ratio
FHA loans consider the borrower’s debt-to-income (DTI) ratio, a measure of monthly debt payments against monthly income. The FHA prefers a DTI ratio of no more than 43%, though exceptions can be made for higher ratios with compensating factors.
Income and employment requirements
There is no specific income threshold for FHA loans, but borrowers must demonstrate steady employment history. Verification includes pay stubs, W-2s, tax returns, and bank statements.
FHA loan limits
Loan limits for FHA loans vary by county. However, starting January 1, 2024, the new FHA loan limit will be $498,257 for a single-family home in most parts of the country. Limits increase for 2-, 3-, and 4-unit properties.
FHA loan rates
Interest rates for FHA loans are competitive and can vary based on factors such as prevailing market rates, borrower’s credit score, income, loan amount, down payment, and DTI ratio. Government backing often enables lenders to offer lower rates compared to conventional mortgages.
Compare your FHA loan rates from multiple lenders. Start here
Today’s rates for a 30-year, fixed-rate FHA loan start at % (% APR), according to The Mortgage Reports’ daily rate survey.
Thanks to their government backing, FHA loan rates are competitive even for lower-credit borrowers. But interest rates can vary a lot from one lender to the next, so be sure to shop around for your best offer.
FHA loan benefits
Check your FHA loan eligibility. Start here
1. Lower down payment: Just 3.5 %
For today’s home buyers, there are only a few mortgage options that allow for down payments of 5% or less. The FHA loan is one of them.
With an FHA mortgage, you can make a down payment as small as 3.5% of the home’s purchase price. This helps home buyers who don’t have a lot of money saved up for a down payment along with home buyers who would rather save money for moving costs, emergency funds, or other needs.
2. FHA allows 100% gift funds for the down payment and closing costs
The FHA is generous with respect to using gifts for a down payment. Very few loan programs will allow your entire down payment for a home to come from a gift. The FHA will.
Via the FHA, your entire 3.5% down payment can be a gift from parents or another family member, an employer, an approved charitable group, or a government homebuyer program.
If you’re using a down payment gift, though, you’ll need to follow the process for gifting and receiving funds.
3. FHA loans allow higher debt-to-income ratios
FHA loans also allow higher debt-to-income ratios.
Your debt-to-income ratio, or DTI, is calculated by comparing two things: your debt payments and your before-tax income.
For instance, if you earn $5,000 a month and your debt payment total is $2,000, your DTI is 40%.
Officially, FHA maximum DTIs are as follows.
31% of gross income for housing costs
43% of gross income for housing costs plus other monthly obligations like credit cards, student loans, auto loans, etc.
However, a 43% DTI is actually on the low end for most FHA borrowers. And FHA will allow DTI ratios as high as 50%. Although to get approved at such a high ratio, you’ll likely need one or more compensating factors — for instance, a great credit score, significant cash savings, or a down payment exceeding the minimum.
In any case, FHA is more lenient in this area than other mortgage loan options.
Most conventional mortgage programs — those offered by Fannie Mae and Freddie Mac — only allow debt-to-income ratios between 36% and 43%.
With down payments of less than 25%, for example, Fannie Mae lets you go to 43% DTI for FICOs of 700 or higher. But most people don’t get conventional loans with debt ratios that high.
4. FHA loans accept lower credit scores
Officially, the minimum credit scores required for FHA mortgage loans are:
580 or higher with a 3.5% down payment
500-579 with a 10% down payment
High credit scores are great if you have them. But past credit history mistakes take a while to repair.
FHA loans can help you get into a home without waiting a year or more for your good credit to reach the “excellent” level. Other loan programs are not so forgiving when it comes to your credit rating.
Fannie Mae and Freddie Mac (the agencies that set rules for conventional loans) say they accept FICOs as low as 620. But in reality, some lenders impose higher minimum credit scores.
5. FHA even permits applicants with no credit scores
What if an applicant has never had a credit account? Their credit report is, essentially, blank.
FHA borrowers with no credit scores may also qualify for a mortgage. In fact, the U.S. Department of Housing and Urban Development (HUD) prohibits FHA lenders from denying an application based solely on a borrower’s lack of credit history.
The FHA allows borrowers to build non-traditional credit as an alternative to a standard credit history. This can be a huge advantage to someone who’s never had credit scores due to a lack of borrowing or credit card usage in the past.
Borrowers can use payment histories on items such as utility bills, cell phone bills, car insurance bills, and apartment rent to build non-traditional credit.
“Not all lenders who are FHA approved offer these types of loans, so check with your loan officer individually,” cautions Meyer.
6. FHA loans can be up to $ in most of the U.S.
Most mortgage programs limit their loan sizes, and many of these limits are tied to local housing prices.
FHA mortgage limits are set by county or MSA (Metropolitan Statistical Area), and range from $ to $ for single-family homes in most parts of the country.
Limits are higher in Alaska, Hawaii, the U.S. Virgin Islands, and Guam, and also for duplexes, triplexes, and four-plexes.
7. FHA also allows extended loan sizes
As another FHA benefit, FHA loan limits can be extended where home prices are more expensive. This lets buyers finance their home using FHA even though home prices have skyrocketed in certain high-cost areas.
In Orange County, California, for example, or New York City, the FHA will insure up to $ for a mortgage on a single-family home.
For 2-unit, 3-unit and 4-unit homes, FHA loan limits are even higher — ranging up to $.
If your area’s FHA’s loan limits are too low for the property you’re buying, you’ll likely need a conventional or jumbo loan.
8. If you have an FHA loan, you can lower your rate with an FHA Streamline Refinance
Another advantage for FHA-backed homeowners is access to the FHA Streamline Refinance.
The FHA Streamline Refinance is an exclusive FHA program that offers homeowners one of the simplest, quickest, and most affordable paths to refinancing.
An FHA Streamline Refinance requires no credit score checks, no income verifications, and home appraisals are waived completely.
In addition, via the FHA Streamline Refinance, homeowners with a mortgage pre-dating June 2009 get access to reduced FHA mortgage insurance rates.
Verify your FHA loan eligibility. Start here
FHA loan disadvantages
What is the downside to an FHA loan? Among the numerous benefits of FHA loans, there are certain disadvantages that potential borrowers should be aware of. These drawbacks can impact the overall cost and flexibility of the loan.
Here are the downsides that you should know about FHA home loans.
FHA loan mortgage insurance premiums
One of the primary drawbacks of FHA loans is the mandatory mortgage insurance premiums. These include an upfront premium at closing, generally 1.75% of the loan amount, and ongoing monthly payments. This additional cost can make FHA loans more expensive over the long term
Loan limits
One notable limitation of FHA loans is the lower loan limits compared to conventional loans, which can be restrictive for higher-income buyers. The FHA mortgage limit for a one-unit property ranges from $ to $ for single-family homes in most parts of the country, which may not be sufficient in areas with higher property values.
Strict property requirements
FHA loans come with stringent property requirements. The purchased home must be the borrower’s primary residence and must meet specific safety and condition standards. This requirement can limit the types of properties that qualify for an FHA loan.
FHA loan alternatives
Alternative loans, like USDA and VA loans, offer distinct advantages, such as no down payment requirements, but come with specific eligibility criteria. Understanding these alternatives ensures you make a well-informed decision about the type of mortgage that’s right for you.
Conventional 97
The Conventional 97 program comes with a down payment requirement of just 3%. It stands out due to the absence of income limits and mandatory home buyer education, making it accessible to a broader range of homebuyers.
Check your conventional loan eligibility. Start here
HomeReady Mortgage by Fannie Mae
The HomeReady mortgage program is designed for low- to moderate-income families, allowing a home purchase with only a 3% down payment. Furthermore, this program permits the entire downpayment and closing costs to be covered by gifts or grants, offering significant financial flexibility.
Freddie Mac Home Possible
The Home Possible loan is notable for its reduced mortgage insurance costs compared to other similar programs. With a 3% down payment requirement and lower ongoing costs, Home Possible is an attractive alternative for those looking to save on mortgage insurance.
USDA loans
USDA loans, backed by the U.S. Department of Agriculture, are an attractive alternative, especially for moderate-income buyers in rural areas. They don’t require a down payment, which is a significant advantage. However, eligibility for USDA loans is restricted based on income and geographical limits, and not every property qualifies for this type of financing.
VA loans
VA loans are another viable alternative, particularly for U.S. military service members, veterans, and certain surviving spouses. Like USDA loans, VA loans also require no down payment. However, eligibility for VA loans is exclusive to the military community, limiting their accessibility to the general public.
FAQ: FHA loans
Can I choose between a fixed rate and an adjustable-rate FHA loan?
Yes, FHA loans offer both fixed-rate and adjustable-rate (ARM) options. A fixed-rate FHA loan provides a consistent interest rate and monthly payment for the life of the loan, ideal for those who prefer stability. An adjustable-rate FHA loan, on the other hand, has an interest rate that can change over time, typically offering lower initial rates.
Do FHA loans have lower interest rates?
FHA loans often have lower interest rates compared to many conventional loan options. This is largely due to the government backing of FHA loans, which reduces the risk for lenders. As a result, lenders are generally able to offer more competitive mortgage rates to borrowers. However, the actual interest rate you’ll receive on an FHA loan can vary based on several factors, including your credit score, loan amount, and the current market conditions. It’s always a good idea to compare rates from multiple lenders to ensure you’re getting the best deal possible for your situation.
Are FHA loans assumable?
Yes. A little-known FHA benefit is that the agency will allow a home buyer to assume the existing FHA mortgage on a home being purchased. The buyer must still qualify for the mortgage with its existing terms but, in a rising mortgage rate environment, it can be attractive to assume a home seller’s loan. Five years from now, for example, a buyer of an FHA-insured home could inherit a seller’s sub-3 percent mortgage rate. This can make it easier to sell the home in the future.
Can you buy a rental property with an FHA loan?
While you can’t buy a true rental property with an FHA loan, you can buy a multi-unit property — a duplex, triplex, or fourplex — live in one of the units, and rent out the others. The rent from the other units can partially, or even fully, offset your mortgage payment.
Are closing costs higher for FHA loans?
Closing costs are about the same for FHA and conventional loans with a couple of exceptions. First, the appraiser’s fee for an FHA loan tends to be about $50 higher. Also, if you choose to pay your upfront MIP in cash (instead of including this 1.75% fee in your loan amount), this one-time fee will be added to your closing costs. Additionally, the fee can be rolled into your loan amount.
What credit score do I need for an FHA loan?
Most borrowers will need a minimum credit score of 580 to get an FHA loan. However, home buyers who can put at least 10% down are eligible to qualify with a 500 score. Yet, each lender may have their own credit score minimums, separate to those established by the Federal Housing Administration.
What is the loan-to-value ratio requirement for FHA loans?
The loan-to-value (LTV) ratio for FHA loans typically cannot exceed 96.5%, meaning you can borrow up to 96.5% of your home’s value. This high LTV ratio is part of what makes FHA loans accessible, especially for first-time homebuyers who might not have substantial savings for a down payment.
How does PMI work with FHA loans?
For FHA loans, the equivalent of private mortgage insurance (PMI) is the mortgage insurance premium (MIP). MIP is required for all FHA loans, regardless of the down payment or loan-to-value ratio. This insurance protects lenders from losses in case of borrower defaults and is included in both upfront and ongoing mortgage costs.
What happens if I default on an FHA loan?
If you default on an FHA loan, the lender can initiate foreclosure proceedings. The FHA loan program, backed by the Federal Housing Administration, is designed to minimize the risk of defaults by offering more lenient qualification criteria. However, consistent failure to make mortgage payments may lead to foreclosure, impacting your credit score and homeownership status.
Today’s FHA loan rates
Now is an opportune time to consider an FHA loan, with current mortgage rates being historically competitive.
FHA loan interest rates are typically among the most competitive. To capitalize on these favorable rates, start by comparing offers from FHA-approved lenders.
Finding the most affordable loan could be just a few clicks away. Begin your journey towards homeownership today by exploring your options and discovering the best rates available for your financial situation.
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