Need a mortgage? Consider an FHA loan

(Money Magazine) -- 1. Chances are good that you'll come across one. During the heyday of no-money-down lending, you were unlikely to have a buyer using a government-insured Federal Housing Administration (FHA) loan, which lets borrowers purchase a home with a down payment of as little as 3.5%. Now FHAs are the only game in town for anyone who can't put down the minimum 10% many banks require to get a conventional loan.

About a third of buyers have 10% or less saved for a down payment, according to a recent Zillow.com survey. No wonder FHA loans have skyrocketed from 3% to 25% of the market. While you may not need to take out an FHA mortgage to purchase your next home, there's a good chance you'll be selling to someone who does.

2. Borrowers can qualify with any income. Historically FHA loans have gone mostly to low-income borrowers. But, in fact, there's no cap on what someone can earn. "The overriding factor that we look at is the ability to make payments," says Lemar Wooley of the Department of Housing and Urban Development.

Borrowing limits may be higher than you think too: Though the max is $271,050 in areas where real estate is cheap, buyers can take up to $729,750 in high-priced markets like California or New York.

3. Expect a tough appraisal. The home will need a clean bill of health from a government-approved appraiser, and the seller must fix any issues before a buyer can close on the loan. A few years ago the FHA eased up on repair requirements for minor problems like missing handrails or cracked windows. But it still won't budge on leaky roofs or mold damage.

If you're selling, know that an FHA appraisal stays on record for six months, even if the deal goes kaput or the buyer switches lenders. "Get one low FHA appraisal and you're stuck with it," says Dallas realtor Bruce Lynn.

4. These loans are pricier than they seem. Nominal rates on FHA mortgages are comparable to those on conventional loans. But hefty fees on the FHA variety up the cost. There's a 1.75% upfront charge as well as a 0.5% annual insurance premium for five years and until the principal balance hits 78% of the sales price or the home's appraised value.

If you're buying, ask if the seller will pick up some of the insurance costs as part of the deal, says Manchester, N.H., realtor Scott Godzyk. According to FHA rules, sellers can pay closing costs up to 6% of the home price.

5. They've gotten easier to obtain. FHAs once had a well-deserved rep for onerous paperwork and a longer, more difficult closing than conventional loans. But thanks to a new automatic underwriting system and the looser repair requirements, FHA mortgages take only a few days longer than conventional loans to close, says Bill Banfield, a vice president at Quicken Loans.

FHA loans still require written documentation of income, including pay stubs and tax returns. But stricter underwriting across the board means that you will probably need such paperwork no matter what type of loan you get.