It’s tough out there in the mortgage market. With credit tight, millions can’t get a mortgage loan – or if they can, they pay through the nose with higher interest rates and higher down payments. But what if you could get a mortgage loan, at a good rate, with only 3.5% cash down on the house? That’s the beauty of Federal Housing Authority (FHA) loans – loans that command 25% of the mortgage market these days.

According to FHA numbers, more than $290 billion in mortgage loans will be dished out to mortgage consumers in 2009, thanks to great home pricing deals, a first-time buyer $8,000 tax credit and low interest rates. And in 2008, more than 630,000 Americans took advantage of FHA loans, many of them low down-payment deals, according to the FHA.

It’s the tax credit – tied to FHA home loans – that might give first-time buyers in particular a real boost. The federal government announced May 29 that home buyers could use their $8,000 tax credit toward a down payment on an FHA loan. Better yet, homeowners can apply the money to the 3.5% down payment minimum laid down by the U.S. Department of Housing and Urban Development.

The fact is, the more money you put down as a down payment, the less interest you’re likely to pay over the life of your loan.

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Another fact: FHA loans are actually easier to get than traditional mortgage loans. Credit requirements are looser – and then there are those lower down payment minimums of 3.5% of the total value of the loan.

So how can you get in on the action? Start by searching the FHA Web site for a qualified lender  - you won’t get far if you’re not using an FHA-approved mortgage broker or lender. Also, if you have really bad credit –as in 500-or-below – expect to have to pay a 10% down payment. Still, that’s not so bad – just try getting that deal in the private sector.

You’ll undergo a credit check, although FHA loans aren’t as stringent about credit scores as most private sector lenders. And expect to pay an insurance premium – most likely an up-front fee of 1% or 2% of the cash value of your mortgage loan. You’ll also need copies of your past two months of bank statements, and your past two years of tax records.

Before you make the jump, beware of loan cap maximums. By and large, the FHA caps loan amounts at $271,000 – but bumps that number up in pricey real estate areas like New York ($625,000) and Hawaii ($721,000).

If you have stable income and can meet the down payment minimums, an FHA loan could be the best move you make.

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