FHA loan costs to increase. Again.

Most first time home buyers use FHA loans because of the low down payment requirement. Only 3.5% of the sale price is needed for down payment. Other advantages are the buyer can have a lower credit score than he can with a conventional loan (a loan that is not insured by the government), and the buyer can receive a gift for the down payment, even if the buyer has no savings.

Because of FHA's popularity, its reserve funds are low. In order to ensure the continued solvency of FHA, mortgage costs are increasing again.

For FHA case numbers pulled on or after April 18, 2011, the annual mortgage insurance premium (MIP) will increase from 0.85% of the base loan amount to 1.1%.

For example, for a house with a sale price of $150,000, the down payment would be 3.5%, or $5,250. The base loan amount would be $144,750.

If you have a purchase contract and your lender pulls an FHA case number lender before April 18, your annual MIP will be $144,750 x 0.9% = $1,303 per year = $109 per month. After April 18, your annual MIP will be $144,750 x 1.15% = $1,665 per year = $139 per month, and increase of $30.

FHA says this will have minimal impact on borrowers. I say if a borrower's buying power is reduced by $30 per month, at 5% mortgage interest rate, the buyer who could afford a $150,000 house this month will only be able to afford a $144,400 house next month.

The mortgage insurance is to protect the lender against loss in the event the buyer doesn't make his payments. It does not protect the buyer.

Why pay any more than necessary for insurance that doesn't benefit you? If you are an FHA buyer sitting on the fence, this might be the time to climb on down and make an offer.