The days of putting little money down to buy a home aren t over.

After years of risky mortgages backed up by small down payments, most lenders aren t underwriting mortgages without a significant sum up front and a high credit score. But a decades-old loophole can still put home buyers in a house for next to nothing. Mortgages insured by the Federal Housing Administration (FHA) allow borrowers to get approved with a down payment as small as 3.5% of the agreed selling price of the house and don t require a high credit score.

As millions of Americans have come to realize, getting into a house for little money down has its disadvantages. Borrowers who ve pumped little equity into their home are often more willing to walk away from it during lean times that keep them from making payments; this risk is further elevated when home values are in decline and troubled borrowers are unable to refinance or sell the home at a price that covers their losses.

Still, FHA-insured mortgages are far less risky than the subprime mortgages that lenders originated before the housing bust. FHA-insured mortgages require documentation and verifiable proof that the borrower is capable of making their monthly payments. (Most subprime mortgages didn t require such proof.)

The looser terms of FHA-insured mortgages have helped make them more popular. Today, FHA-insured mortgages make up about 25% of the mortgage market, up from 3% in 2006, FHA commissioner David Stevens said in a speech earlier this month. In June, the FHA insured 194,000 loans the highest monthly total in the agency s history, according to Stevens. For fiscal year 2009, the dollar amount of FHA-insured mortgages is likely to reach 30% of mortgage originations, up from around 4% in 2005 and 2006, says Stu Feldstein, the president of SMR Research, a mortgage-data tracking firm.

FHA-insured mortgages are one of the only games in town, especially if you can t qualify for a traditional mortgage, says Gibran Nicholas, the chairman of the Ann Arbor, Mich.-based CMPS Institute, which trains and certifies mortgage lenders and brokers. Now that the subprime market is gone, FHA is filling the gap.

Here s how to determine if an FHA-insured mortgage is right for you.

Do you meet the qualifications?

Most borrowers of FHA-insured mortgages have stable sources of income and need more flexibility with their credit history and debt load than a conventional mortgage loan might allow, says Lemar Wooley, a spokesman for the Department of Housing and Urban Development (HUD), which FHA is part of.

When analyzing the borrower s credit, we expect lenders to examine the overall pattern of credit behavior rather than isolated occurrences of poor performance or relying solely on a credit score, says Wooley. This includes a borrower s rental or mortgage payment history, debts, collections, previous foreclosures and bankruptcies. Borrowers with a credit score less than 500 must make a 10% down payment to be eligible, he says.

Today, 78% of FHA-insured purchase-mortgages belong to first-time home buyers, thanks to looser requirements and the comparatively small 3.5% down payment, says Wooley. (Another perk is that borrowers are permitted gift assistance for the down payment from their family, employer or a government entity, but not the seller.)

Rigorous documentation requirements are designated to mitigate the risk associated with making a small down payment a stark contrast from the glory days of subprime mortgages, when documentation was rarely required and verified, Nicholas says. FHA-insured mortgage borrowers will have to prove they have the cash to close the mortgage by presenting their most recent bank statements. They ll also have to prove they can repay the mortgage by showing W2 statements and paystubs.

In addition, borrowers total mortgage payments (including principal, interest, taxes and insurance) debt-to-income ratio can t exceed 31% of their gross monthly income, and total debt-to-income (total mortgage payment plus all other debts) ratio can t exceed 43% of their gross monthly income.

Now, interest rates on FHA and non-FHA mortgages aren t too different. A 30-year fixed-rate FHA-insured mortgage had an average rate of 5.44% for the week ending Aug. 7, compared to an average rate of 5.42% for a 30-year fixed rate non-FHA mortgage, according to Keith Gumbinger, a vice president at HSH Associates, a mortgage-data tracking firm.

However, there are unique fees that accompany an FHA-insured mortgage. A borrower is required to pay 1.75% of the loan amount upfront, or that fee can be financed into the mortgage. FHA-insured mortgages also require a 0.5% annual premium based on the outstanding loan balance and financed into the mortgage. These fees pay for the FHA insurance that makes the loan possible, Wooley says.

A borrower who has a high credit score typically a minimum of 720 and a 20% down payment is often better off with a traditional non-FHA mortgage, which includes fewer fees. However, the math gets tricky when a borrower has a high credit score but a down payment less than 20%; in those cases, the borrower will have to pay for private mortgage insurance (PMI). Depending on your situation, PMI can cost less, the same or more than FHA fees.

Crunch the numbers here to see how much you ll pay in PMI.

What protections are in place for the lender?

Lenders are comfortable providing FHA-insured mortgages because they don t bear the loss if a borrower defaults on their payments and goes into foreclosure the FHA does.

In such a scenario, the FHA pays the lender an insurance claim equal to the sum of the unpaid principal balance of the loan, foregone interest and a portion of the foreclosure expenses, Wooley says. The FHA pays for these losses by dipping into its insurance fund, which holds the insurance fees borrowers pay, Nicholas says.

What about for the borrower?

When borrowers are unable to keep up with their mortgage payments, their lender is required to work with them to avoid foreclosure, Wooley says. This is part of FHA s Loss Mitigation program.

As of Saturday, mortgage servicers can use this program to reduce monthly mortgage payments to 31% of the borrower's monthly gross income, Gumbinger says. To qualify, borrowers must be unable to keep up with their mortgage payments but cannot be more than 30 days delinquent.

Although this program can help prevent foreclosures, it doesn t guarantee that the borrower ultimately will be able to hold onto their home, Gumbinger says.

Who is taking the biggest risk?

Under certain circumstances primarily, rampant FHA-insured mortgage underwriting and declining home values these mortgages present a significant risk to the economy. When home values decline, a borrower who has little equity in their home and is falling behind on payments is more likely to walk away from the property than a borrower who has more equity in the home and is more inclined to hold on to it, says Dean Baker, a co-director at the left-leaning Center for Economic and Policy Research in Washington, D.C.

If a significant portion of FHA-insured mortgage borrowers go into foreclosure, the FHA insurance fund could become depleted, and the government may have to bail it out, Nicholas says. Those losses may ultimately fall into the hands of the taxpayer or get added to the country s debt, Baker says.