The FHA loan is very popular among consumers for many reasons. It's now easier than ever to qualify for the Federal Housing Administration-backed loan. Major lenders are now accepting credit scores of only 600. This is 40 points lower than only a year ago. The demand is high for these loans and it's easier than ever to qualify.

The FHA is so popular because of its relaxed nature. Unlike a conventional loan, FHA loans require a very small downpayment and accept low FICO scores. The minimum downpayment is only 3.5% and borrowers are allowed to finance a home only 12 months after a bankruptcy, short sale or foreclosure.

The FHA itself does not make loans. It insures them. The FHA loan's purpose is to basically give incentive to lenders to finance applicants they normally would not. Lenders are very picky about who they lend to because of the risk factor. The FHA promises to make up the money in case of default. This opens homeownership to a whole new group of people.

In order to qualify for an FHA-backed loan, one must meet "FHA guidelines." The FHA's guidelines are very relaxed; but this does not mean lenders will be as lenient as the guidelines. Even when the FHA does not require verification of income, employment or credit score during a refinance, most lenders will collect this information anyway. This is because lenders are penalized by the Federal Housing Administration for "bad loans."