For the second time in 4 months, the FHA is changing the way it charges mortgage insurance. The change is forcing homeowners and home buyers using FHA financing to make a monetary decision -- use the current system for FHA mortgage insurance, or to wait for the new one to take effect?

The answer roots in mathematics, but first, some FHA background.

How FHA-Insured Mortgages Work

Most people forget -- the FHA is not in the business of making loans to homeowners. Rather, the FHA insure loans that lenders make to borrowers. The FHA puts out a set of guidelines says to banks that "so long as your borrowers meets these requirements, we will insure the loans you make to them."

Now, banks don't expect their FHA-backed loans to go bad, but when their loans default, the FHA steps in and makes payment on them similar to how any insurance-type company would operate.  And, to fund these claims, the FHA uses its insured borrowers' own money.

Homeowners backed by the FHA pay into the FHA insurance fund in two ways:

1. With a one-time, upfront payment at closing called Upfront MIP
2. With an monthly, pro-rated annual payment called Annual MIP

Mortgage insurance premiums kick off a lot of money and the FHA has been self-funded for years without issue.  However, as FHA home loan defaults have climbed recently, so have insurance payouts to lenders.  It's put a ginormous strain on the FHA's solvency.

For example, in September 2008, the FHA held $19 billion in reserves. Today, that number is $3 billion.

In the FHA's own words, the groups reserves are "perilously low".

Summarizing The FHA Mortgage Insurance Changes

As a means to help refill its coffers, therefore, the FHA is changing its upfront and annual mortgage insurance premium structure.  It's the second tweak of 2010 and the changes apply to FHA case numbers issued on or after October 4, 2010.

Under the updated mortgage insurance program, assuming a 30-year fixed rate FHA mortgage with at least 5 percent equity:

• Upfront MIP drops to 1.000% of the amount borrowed from 2.250%
• Annual MIP increases to 0.850% of the amount borrowed from 0.500%

For homeowners using an FHA-insured mortgage, the upfront cost of the loan will drop by a lot, but the long-term costs of the loan will grow.

Using a $200,000 mortgage as an example, upfront MIP falls to $3,000 from $7,750; monthly MIP jumps to $212.50 from $125.00.  The FHA expects the change to yield an additional $300 million in premiums monthly.

Work The Change In FHA Premiums To Your Advantage

Homeowners wanting an FHA-insured mortgage should remember the October 4, 2010 implementation date.

If your FHA case number is assigned on, or after, that date, you will get the 1 percent upfront cost + the 85 basis points each year thereafter. If it's assigned prior to, you'll get the 2.25 percent + 50 basis points.

Or, simplified:

• Current system : Big upfront costs, low long-term costs
• New system : Low upfront costs, big long-term costs

So which is best, then?  It depends on your timeline.

The mathematical break-even point on the current FHA system versus the new one is Month 43. If you know you'll sell or refinance in fewer than 3 years, 7 months, you should wait to start your mortgage application until after the October 4, 2010 changeover.

On the other hand, if this is your "last home for life", give that application as soon as possible!

The math works for all loan sizes, too -- from $75,000 all the way up to the FHA loan limits for your area.

Start Your FHA Home Loan Application Online

If you’re unsure of how FHA mortgage premiums work, or how the change will affect your payments, etc, just . I answer all of my own emails and will get back to you quickly.

NOTE : The FHA originally announced an implementation date of September 7. That date was later amended to October 4, 2010.

Looking to FHA for your next mortgage? Get a move on!  Although you have until Friday, April 2, 2010 to get your application in, Friday is Good Friday and most banks will be closed.

Your true FHA deadline is Thursday, April 1.

Guidelines Change In 3 Days

To shore up its balance sheet and dwindling capital reserves, the Federal Housing Authority is rolling out sweeping financial changes. Starting next week, FHA borrowers must to look better on paper and to be better credit risks.

Mortgage insurance premiums are rising, too.

In its official announcement, the FHA said its trying to better position itself to "manage its risk while continuing to support the nation’s housing market".

The changes start with case numbers assigned on or after Monday, April 5, 2010.

Reviewing The FHA Mortgage Changes

One widely speculated change wasn't made -- the increase of the FHA minimum downpayment.  Homebuyers in Cincinnati, Chicago and elsewhere can still buy with just 3.5 percent down.  However, the group did roll out a number of other changes, including:

• An increase in Upfront MIP from 1.75 percent to 2.25 percent
• A plan to reduce maximum seller contributions from 6 to 3 percent by summer
• A Congressional request to increase monthly mortgage insurance premiums

Furthermore, the FHA's new guidelines institute a minimum FICO requirement of 580 to make the minimum 3.5% downpayment, requiring 10 percent for any applicant whose credit score falls below that level.

2010: The Year Of Investor Overlays

But, just because the FHA allows 580 FICOs, banks don't have to allow it.

The official term here is "investor overlay". It's when that banks use Federal Housing Authority guidelines as a starting point for their own set of underwriting rules which are often more strict.

And banks have a good reason for making investor overlays.

In January, the FHA subpoenaed 15 lenders -- including the well-respected 1st Advantage Mortgage in Lombard, Illinois -- because of abnormally-high FHA default rates.  The act was a shot across the bow, it appears, because more lenders have been shut down since.

The FHA made a loan performance benchmark and if a  bank's defaults exceed the mean by x number of sigmas, said bank loses its FHA license. Period.

Expect FHA investor overlays to be a running theme of 2010.

Your FHA Mortgage Denial May Be Reversible

Starting immediately, FHA mortgage guidelines will vary from bank-to-bank as lenders get more active about their originated mortgages.  Going forward, what gets FHA-approved Bank of America, for example, may not be FHA-approved at Wells Fargo.

FHA loans will now be denied simply because the applicant applied at the "wrong bank".

If your mortgage has been denied or you just want to have the best chance of being approved possible, call or with some notes on your situation. I work for Waterstone Mortgage -- a HUD-approved lender.  We underwrite and fund FHA mortgages from our own accounts, and work with the nation's largest investors as an approved conduit.

In other words, apply once and I'll automatically align with the best pricing and fewest overlays. to email me about getting started.

FHA mortgage rates are lower than conventional mortgage rates right now.

It's an interesting development, especially for homeowners and home buyers with low equity.

Unless you've got 20 percent into a property, if you're locking a 30-year fixed rate mortgage, there's compelling reasons to go FHA.

The first reason to choose FHA is an obvious one -- mortgage rates are lower. Right now, there's 1/8 percent difference between the comparable FHA and conventional 30-year fixed products and, over 30 years on a mortgage, that can really add up.

The second reason why FHA may be better than conventional right now is that FHA mortgage insurance premiums are lower versus the private insurance offered through Fannie or Freddie.

On a 10-percent-down home loan for applicants with A-plus credentials, FHA insurance ends up being cheaper by 0.34% per year.

Assuming a $200,000 mortgage, that's $680 per year and for people with FICOs under 740, the savings get substantially bigger. Find out your credit score for free from CreditReport.com if you don't know it already.

Despite these two reasons, however, when it comes to mortgages, we have to remember that it's not always about rate.  Costs matter, too.  FHA mortgages may be cheaper than conventional loans on an on-going basis, but they're rarely cheaper at the outset.

This is because FHA mortgage carry mandatory, up-front closing costs.  On streamline refis, the fee is 1.5 percent FHA fee; on purchase and regular refis, it's 1.75 percent; on "delinquent" mortgages, it's 3.0 percent.

Homeowners torn between FHA and conventional may find FHA "rate-attractive" but cost-prohibitive.  The math will vary from home-to-home, and homeowner-to-homeowner. Given the FHA's low rates, however, the program at least warrants some consideration.

To see how the math compares on your home, or pending home purchase, call or with the details of your situation. We'll see how the math works out best for you.

Private Mortgage Insurance is an insurance policy that is paid by homeowners for the benefit of lenders.

It's required for all conventional-mortgage homeowners whose loans exceed 80% loan-to-value.

Similar to homeowners insurance, private mortgage insurance gets "cashed in" when a loss occurs. In the case of the former, the loss may be storm damage; the latter, mortgage default.

With foreclosures proliferating, PMI defaults are up 26 percent over last year and double the levels from 2007.  Private mortgage insurers are paying out on many more claims than was expected and, as a result, are booking huge losses.

Homeowners are about to pay the price. To shore up balance sheets and protect against future losses, mortgage insurers have raised insurance rates and toughened underwriting guidelines.

Some of the changes we're seeing include:

• Minimum FICO requirements of 720 based on loan-t0-value
• Maximum debt-to-income ratios of 41%, regardless of Fannie Mae approval
• Loan size limitations, based on the health of the local real estate market

And, of course, insurance premiums are increasing for everyone.

It's a 2-pronged attack that will make a less-than-20%-downpayment more costly for Fannie Mae- and Freddie Mac-backed mortgage.

The alternative is to look to the FHA for a mortgage.  There's 2 advantages here.

First, as compared to PMI rates, FHA mortgage insurance looks cheap.  A $200,000 FHA home loan with 10% down can save as much as $400 in insurance costs.  With 5% down, that number grows to $1,040 per year.

Second, with FHA mortgage rates running neck-and-neck with conventional ones, there's a lot of days when 30-year fixed mortgage rates are cheaper in the FHA market versus the conventional one.

The downside of FHA is that the government puts up to 1.750 percent insurance fee into your loan at the time of closing.  It's a cost that doesn't exist in the conventional world and, for some people, the fee makes FHA an imperfect fit.

The key is to talk with your loan officer about Conventional and FHA mortgages to make sure you're making the right choice.

For help with your FHA vs Conventional decision, anytime with the details of your situation.  I answer all of my own emails and am happy to help you with what I know.

Plus, my rates are really good.