One of the most common misconceptions of the modern FHA loan program is that FHA or HUD is responsible for setting interest rates on the home loans insured by an FHA loan.
It’s easy to understand why some might think that is true; the FHA does place limits on certain fees, how closing costs and down payments are paid and by whom. Why wouldn’t the FHA also regulate the interest rates of an FHA-insured mortgage?
The FHA does regulate (but does not set) interest rates in some cases. Any FHA-insured adjustable rate mortgage, for example, has built-in limits on when the rates can be adjusted, and how often. There are even caps on how many percentage points may be changed over the lifetime of the variable rate loan. But what the FHA does not do is to tell the lender what that interest rate must be. That’s a detail the borrower and the lender must negotiate themselves.
Negotiation is an important part of the FHA home buying process.
According to the FHA official site, “FHA does not regulate or set the interest rate, discount points, or closing costs that a lender may charge. The rate, points and other fees are negotiated between the borrower and the lender.”
This is one reason why FHA loan counselors urge borrowers to shop around for a lender and carefully compare rates, terms and conditions. Borrowers who don’t look for the best deal from a lender won’t save as much money over the lifetime of the loan as those who do, regardless of whether the loan is an FHA or conventional mortgage.
But even without the comparison shopping factor, FHA loans do have ways to save borrowers money–or at least offer loans for similar costs typical in the market. The FHA rules are filled with instructions to the lender stating fees must be “customary and reasonable”. Some loans, such as 203(k) rehab loans, and FHA HECM or reverse mortgages, feature fee caps. The goal is to protect borrowers from actual or perceived price gouging, artificially inflated costs or expenses, or escalating fees based on a certain type of loan over another.