The borrower is able to put up 3 percent as a down payment in cash, and the borrower does not want an interest-only mortgage or an option adjustable rate mortgage. A borrower who meets FHA credit standards will usually do better with a FHA loan than with a less than traditional loan.  Even though buyers are required to carry a mortgage insurance policy, the rate will be lower and the borrower will have access to a large menu of mortgages, and there are no prepayment penalties to worry about.

The FHA loan limits can be an obstacle.  FHA loan limits are not the same as Fannie Mae and Freddie Mac at this time.  HUD is trying to get that rectified.  This would mean an increase to $417,000 that would be uniform all across the country.

The FHA down payment requirements of 3 percent down compared to 5 percent on most conventional loan programs.  However there are zero down loans that are widely available in conventional loans, but FHA remains the same with the 3 percent down requirement.  The down payment assistance programs available to FHA borrowers offset this disadvantage of FHA 3 percent down program.  One form of such assistance is second mortgages at special rates.  This is the preferred method used by public agencies at the city, county, or state levels.

A second form of assistance is cash contributions from non-profit organization and corporations.  These have no repayment obligations, but the funds provide income from home seller who take into account the contributions in setting their sales prices.

Neither type of assistance is a good substitute for the zero down program bill that was introduced in Congress in 2004.  So far this bill has still not passed.