February 14, 2014
Some who are new to the FHA loan application process might believe that the FHA sets or regulates interest rates on the mortgage loans it guarantees. But the truth is, the lender and the borrower negotiate the interest rate as part of the application process. All FHA loans are processed on an individual basis, and the borrower’s credit history and other factors can play a role in what kind of rate is offered.
What does this mean? The interest rates available to an FHA loan applicant may depend on the borrowers FICO scores and other financial qualifying data–some borrowers are entitled to the “best execution” rate because of outstanding credit scores and repayment histories. Others may have to negotiate the rate based on the results of their credit reports–a borrower with less than ideal credit may not have access to the most competitive rates available.
The FHA loan rules that govern interest rates are found in HUD 4155.1 Chapter One. The rules say, “Under all currently active FHA single family mortgage insurance programs, the borrower and the lender negotiate the interest rate and any discount points.”
Discount points can be purchased by the borrower to lower the interest rate–a borrower who chooses discount points may do so in order to lower the overall cost of the loan over the long term. Chapter One adds, “Lenders are permitted to charge a commitment fee to guarantee, in writing, the interest rate and any discount points for a specific period of time, or to limit the extent to which the interest rate or discount points may change.”
Borrowers decide to commit to the loan and the lender can borrower can commit to an interest rate lock-in, which protects the borrower from interest rate fluctuations for a limited time. Chapter One defines the rules for interest rate lock-in commitments as follows:
“The minimum time for lock-ins or rate locks is 15 days. The loan may close in less than 15 days at the convenience of the borrower, and the lender may still earn the lock-in fees. Lenders must honor all such commitments.”
The FHA interest rate lock-in policies are important to know because of the rule that requires lenders to re qualify a borrower in cases where there’s a change in the agreement over interest rates and discount points. Specifically, Chapter One says ” The lender must re-qualify a borrower if there is any increase in either the interest rate, or discount points.”
Do you have questions about FHA home loans? Ask us in the comments section. You can apply or get pre-approved for an FHA loan at FHA.com, a private company and not a government website.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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