It’s a great deal — but there’s a catch.
Mortgage rates have been exceptionally low during the second part of 2020, to the point where they keep hitting new records. And now, borrowers also have a new loan option at extremely low rates.
Mortgage wholesaler United Wholesale Mortgage says it will now offer FHA loans with rates as low as 1.999%. FHA loans are backed by the Federal Housing Administration and can be easier to qualify for than other mortgages. For one thing, there are lower credit score requirements. With a conventional mortgage, you generally need a minimum credit score of 620 to get approved. With an FHA loan, you might qualify with a score of just 500 — as long as you can make a 10% down payment.
In fact, FHA loans make it easier to buy a home when you don’t have much of a down payment. Borrowers with slightly higher credit scores can qualify with as little as 3.5% down on a home.
Earlier in the year, United Wholesale Mortgage offered conventional 30-year mortgages at 1.999%, and 15-year loans at 1.875%. But this is the first time it’s made FHA loans available at comparable rates.
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Now at this point, you may be thinking “What’s the catch?” And actually, there is one — though it’s not necessarily a deal-breaker.
Gear up for higher fees
When you take out a mortgage, you’re responsible for closing costs — fees that a lender charges to finalize a loan. These include loan origination fees, recording fees, appraisal fees, and many more.
United Wholesale Mortgage is telling prospective FHA borrowers to expect $5,700 in closing costs, and that likely includes points. Points on a mortgage allow you to pay a fee in exchange for a reduced rate. One point generally costs 1% of the loan amount and knocks 0.25% off of a rate. Or, to put it another way, a mortgage rate of 2.25% becomes 2% if the borrower pays one point, or 1% of the loan amount up front.
FHA loans also come with mortgage insurance premiums. Buyers should gear up for a 1.75% mortgage insurance premium at closing (in other words, 1.75% of the loan amount). After that, be prepared to pay 0.85% in annual mortgage insurance premiums.
To be clear, these premiums aren’t specific to United Wholesale Mortgage. They’re fees that come along with taking out an FHA loan.
Still, to snag a 1.999% rate on an FHA loan, $5,700 at closing may be more than worthwhile. And if you’re worried about having to pay that money up front, fear not — usually, you’ll get the option to roll your closing costs into your loan. That will make your monthly payments higher, but you won’t have to worry about coming up with that money on the spot. And while $5,700 may seem like a lot to pay in closing fees, you should know that it’s not unusual. The average borrower pays between $5,000 and $12,500 in closing costs, according to research by The Ascent. In that context, $5,700 actually sounds like a pretty good deal.
Keep in mind, though, that to snag a 1.999% rate on an FHA loan, you’ll need great credit — a minimum score of 640. You can qualify for an FHA loan with a lower score, but you’ll need stronger credit to snag the best rate available.
Should you apply for an FHA loan?
If you’re eager to buy a home and don’t have the best credit or much of a down payment, then an FHA loan could be a good solution. The fact that one lender is offering really low rates on an FHA loan is encouraging, but your best bet is still to shop around with multiple lenders and see what offers you qualify for before making your decision.