For poor credit mortgage borrowers, the Federal Housing Administration (FHA) offers government-backed loans that are often a better deal than non-government loans. That's why it was news when, in October 2011, temporary loan size increases -- authorized by Congress in 2008 to help relieve the effects of the housing crisis -- expired.

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For a while, these "jumbo conforming" mortgage limits, which raised the FHA loan limits to $729,750 in some areas, went away. Prospective borrowers in high-cost areas were particularly out of luck, because lenders impose stricter guidelines for jumbo mortgage approvals. Provisions of the Housing and Recovery Act dropped loan limits to 15 percent more than median home prices -- capped at $625,500 rather than $729,750 for high-cost areas.

However, in November, Congress raised the FHA loan limits, restoring them to their recent, higher levels. The increased mortgage limits are in effect until 2013. This step makes it easier for those who need the flexibility of FHA's underwriting to get approved for a new home loan or mortgage refinance.

If you already have an FHA loan, the new limits mean you may be eligible for streamline refinancing at higher limits. Underwater homeowners with FHA mortgages can refinance with no credit check. You may not even need an appraisal.

The FHA loan advantage

To see why having FHA loans as an alternative is advantageous, take a look at some typical jumbo mortgage guidelines. Here's what you're up against if you try to buy or refinance in an expensive area like San Francisco, Calif., or Arlington, Va.

  • You must have a 20 percent down payment or 20 percent home equity, because mortgage insurers won't insure jumbo mortgages.
  • Those with less than 35 percent home equity or down payment need a 720 minimum FICO score, and everyone else needs at least 680 to qualify.
  • Investment properties not eligible.
  • The maximum debt-to-income ratio is 45 percent.
  • A second home purchase requires a 35 percent down payment.
  • Declining markets reduce loan-to-value by an additional 5 percent in Arizona, California, D.C., Florida, Michigan and Nevada.
In contrast, FHA borrowers still only need 3.5 percent down and can refinance up to 97.75 percent of their home's value -- even more if they do a streamline refinance on an existing FHA home loan. FHA home buyers can get assistance from the seller of up to 6 percent of the sales price. FHA home buyers only need credit scores of 580 to 640 to be eligible for financing.

Qualifying for an FHA loan

FHA may allow lower credit scores, but that doesn't mean that people with bad credit automatically get mortgages. Your credit problems must be behind you: You must be paying your bills on time and not accruing any more collection accounts, judgments or other black marks. You must also be able to prove that you have sufficient income and stable employment.

However, if you have truly overcome your credit problems, an FHA mortgage could make it easier for you to get into a home of your own -- even in an expensive neighborhood.