Who should take an FHA?

Federal Housing Administration, or FHA, loans are best suited for two types of people: those who can't afford the down payment required for conventional loans, and people who's credit score only qualifies them for sub-prime interest rates on conventional mortgages. (A sub-prime interest rate is higher than standard mortgage rates, and is reserved for people with poor credit who represent a higher risk to the lender.)

FHA loans only require a 3% down payment. In some cases they've been known to take as little as 1% down. This makes them ideal for people who have adequate income to qualify for a mortgage, but don't have a 10-20% down payment. In addition, the down payment can be a gift from a friend or family member. You have to prove that you've received the money (with either a bank statement or deposit slip), but 100% of the down payment can come from someone else.

If you have a low credit score or have recently filed for bankruptcy, an FHA loan is your best option. Because the loan is insured by the FHA, lenders are more willing to consider working with you. Your interest rate may still be a bit higher, but as you rebuild your credit, you'll have the option of refinancing at a lower rate.