First-time home buyers and buyers recovering from bruised credit are likely candidates for FHA (Federal Housing Administration) loans, although anyone is eligible to apply. FHA loans allow for down payments as low as 3.5 percent--among the lowest down payments in the industry. That makes FHA loans attractive to many buyers, including those with low and moderate incomes.

Easier Credit Standards

Consumers recovering from poor credit are attracted to FHA loans because the loans are often available to people with lower credit scores. In fact, many borrowers find it much easier to qualify for an FHA loan.

Bankruptcies and Foreclosures

The FHA is more understanding than many other lenders about past credit issues such as bankruptcies and foreclosures. A consumer emerging from bankruptcy would have to wait two years before applying for an FHA loan, according to the agency's guidelines in 2010. With other types of loans, the wait is often four years. Also, a consumer with a foreclosure history has to wait three years after the foreclosure to apply for an FHA loan, compared to four years for other types of loans.

Non-traditional

In additional to traditional housing such as single-family homes and townhouses, FHA provides mortgages for mobile homes and factory-built housing which are often less expensive than other forms of housing.

Competitive Interest Rates

FHA loans often cost less than other loans, and that's another attraction for first-time and lower income buyers. FHA loans have competitive interest rates because the federal government insures the loans. That eliminates risk for lenders, which pass along the savings in the form of more competitive rates.

Changing Guidelines

FHA loans are still a good deal for some, but qualification standards have been increasing. In 2009, the minimum down payment rose from 3 percent to 3.5 percent, and in 2008 down payment assistance for low- and moderate-income buyers were eliminated.

Source:

FHA: Down Payment Grants

HUD: FHA Resource Center

More Information:

BusinessWeek: Reviving Down Payment Assistance Program Faces FHA Opposition