Some lenders and brokers say consumers who have dinged credit or are short of cash should consider FHA, which is filling the void left by the implosion of subprime lenders. FHA backing protects lenders from loss, so they are more willing to make riskier loans.

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SANTA ANA, Calif. —

Tara Poulsen bought a four-bedroom house in Orange County for $469,000, after waiting out the housing market for more than three years.

To do it, she and her husband went with a federal loan program that waned in popularity in some areas during the housing boom.

They got a loan insured by the Federal Housing Administration, which accepts borrowers with spotty credit. Poulsen’s husband has a midrange credit score and filed for bankruptcy about 10 years ago, she said.

Some lenders and brokers say consumers who have dinged credit or are short of cash should consider FHA, which is filling the void left by the implosion of subprime lenders. FHA backing protects lenders from loss, so they are more willing to make riskier loans.

Poulsen, who manages a medical office, said she recommends FHA to other buyers but warns that the process can be long, involves extra costs, and requires a lot of paperwork, including tax returns, paycheck stubs and bank statements. Her expected 30-day escrow turned into 45 days, she said.

“It was super stressful,” Poulsen said. “I didn’t sleep for two weeks. Every night I was wondering, ‘Is our loan going to close?’ “

But she said she is glad to finally have a house and to have gotten a loan amid the credit crunch. She and her husband have waited out the market since their marriage in 2004.

Some FHA employees envision a comeback.

“With everybody else walking away, FHA is absolutely the dominant player left standing,” said Meg Burns, director of the agency’s division that establishes policies to qualify borrowers.

Burns likens the current market to a recession in the 1980s that hurt housing markets in Texas and other oil-producing states. Lenders tightened standards in those markets, and private mortgage insurers pulled back, leaving the FHA to step in and stabilize markets, she said.

The FHA has a history of helping consumers and stabilizing markets.

Congress created the agency in 1934 to boost homeownership amid the Great Depression. In the 1940s, the FHA financed military housing as well as home loans for World War II veterans.

Might be best option

Today, consumers who might not have ever considered an FHA loan might find it their best option. The FHA accepts low credit scores and targets any homebuyer with little in savings.

Al Hensling, head of United American Mortgage in Irvine, Calif., which brokered the Poulsens’ loan, said larger FHA-insured loans compare favorably to larger loans sold to government-sponsored enterprises like Fannie Mae, the largest U.S. funder of loans.

The FHA allows lower credit scores and lower down payments — as little as 3 percent — than do Fannie Mae and Freddie Mac, Hensling said. He said GSEs require at least 10 percent down on larger loans.

One downside: The FHA requires an insurance premium on all loans, usually 1.5 percent of the loan amount. The premium can be “financed” — added into the loan amount. GSEs require insurance on loans above 80 percent of the value of a home.

Private markets

Hensling said the recent collapse of investment banking giant Bear Stearns, a big player in mortgage-backed securities, illustrates the breakdown of a private market for loans.

“There is no secondary market right now,” he said. He described the FHA as just about the “salvation for the market.”

And the FHA is seen as a tool to stem foreclosures on subprime loans. President Bush has twice expanded the types of subprime loans the FHA can back. Last month the FHA said it can insure an adjustable-rate loan after a lender slashes the principal balance to make it more affordable, even if the borrower missed two or three payments.

Still, some academic experts expressed concern over the FHA backing larger loans.

Default trend

Kerry Vandell, professor of finance and director of the Center for Real Estate at University of California-Irvine’s Paul Merage School of Business, said FHA loans tend to default more often than loans sold to Fannie and Freddie.

The trend correlates with the FHA’s historical push into inner cities as well as generally to borrowers with marginal credit, he said.

Bush has said the FHA expansion will be funded by insurance premiums paid by borrowers and not with taxpayer funds. Vandell isn’t so sure.

“Whether this movement is going to maintain the viability of the insurance reserve pool is another question,” Vandell said. “It’s not clear to me exactly what they are going to do or which part of that market they are going to take.”