Having done one calculation to determine the down payment, the old rules required a second accounting.

We now combine the purchase price ($150,000) with allowable closing costs ($5,000). We then take our total, $155,000, and multiply by 97.75 percent. The total loan amount under this formula is $151,512.50, however under another special rule we round this number down to the nearest $50, and get $151,500.

Our final step is to look at the loan amounts determined with each calculation and then select the smaller of the two -- $146,250 in this example. This is the maximum amount that could be borrowed under the old FHA guidelines.

Under the new loan formula -- a formula used experimentally in Alaska and Hawaii and now set for nationwide application -- we have a different approach according HUD's instructions (Mortgagee Letter 98-29) to lenders.

For states with low closing costs, the amount of that can be borrowed is:

• For properties with a sale price or appraised value (whichever is less) equal to or less than $50,000, multiply by 98.75 percent.

• For properties with a sale price or appraised value (whichever is less) in excess of $50,000 but less than $125,000, multiply by 97.65 percent.

• For properties with a sale price or appraised value (whichever is less) of more than $125,000, multiply by 97.15 percent.

• For properties with a sale price or appraised value (whichever is less) equal to or less than $50,000, multiply by 98.75 percent.

• For properties with a sale price or appraised value (whichever is less) greater than $50,000, multiply by 97.75 percent.

So, for a home costing $150,000 with $5,000 in borrower-paid closing expenses, under the new guidelines the loan amount in a state with high closing costs would be $146,625 ($150,000 x 97.75 percent), the balance would be $3,375 ($150,000 less $146,625) and the minimum down payment would total $8,375 ($3,375 plus $5,000).

In addition to $8,375, a borrower in this example may also need cash at closing for prepaid expenses, discount points, rounding down to the nearest $50, repairs and improvements that must be paid with cash and not FHA loan funds, mortgage insurance premiums paid in cash at closing, and miscellaneous expenses.

Also, while this example shows a lower down payment cost, there are cases where borrowers will need more cash under the new rules. In all cases, expect to pay at least 3 percent of the purchase price in cash.

Also in this example, the cash needed to close would be reduced by $375 when compared with the old formula, plus a hidden problem would be resolved: Under the old rules to find the loan amount and down payment you had to know how much cash was required for closing. If closing cost estimates changed between the time of the loan application and closing, everything would have to be re-figured -- which could mean a surprise request for additional dollars at closing.

The FHA has been an enormously-useful program since it began in the 1930s and it's still important today -- in 1997 nearly 840,000 FHA loans were created. The new loan limits and down payment schedule make a good program more attractive, something likely to be noticed by purchasers who wish to buy with little down.

The new rules go into effect December 21st, until then lenders may apply either the new schedule or the old one. For details, speak with brokers and lenders in your community.

Question Of The Week

Q We own a single-family rental property and wish to refinance. We will be moving back in within six months. Should we refinance now or wait until it's an owner-occupied unit?

A There are two issues here.

We can quote today's interest rates but we don't know what they'll be in the future, thus there's no way to tell which time will be best for refinancing. If you believe rates will rise, then refinancing now may be appropriate, even if investor terms may not be as good as those available to owner-occupants. If you believe rates will hold steady or decline, then waiting is the best choice.

We also know that owner-occupants typically qualify for more loan programs with better rates and terms than investors. If credit is an issue, then refinancing now as an "investor" may not be a good strategy.

Weekly Resource