The good news: You’ve found your dream home.

The bad news: You don’t have enough cash for the 20 percent down payment often required in today’s tougher mortgage market.

Before you give up or settle for a cheaper home you really don’t want, look into a loan backed by the Federal Housing Administration. Many people qualify for FHA loans that require down payments and closing costs as low as 3.5 percent of the sales price.

FHA-approved lenders are willing to offer these deals because the FHA promises to protect them from loss when a homeowner stops making payments.

But there is a price for this insurance: At closing, the borrower pays a fee equal to 1.5 percent of the loan amount. And there’s an annual fee equal to 0.5 percent of the loan.

Because of the insurance, FHA loans are available to borrowers who might not qualify for ordinary mortgages because of less-than-perfect credit.

To qualify, you generally must not have filed for Chapter 7 bankruptcy in the past two years or Chapter 13 bankruptcy in the past year -- nor should you have been through a home foreclosure in the past three years.

Generally, you should be up-to-date on federal debts such as student loans and you should have no outstanding legal judgments against you. You should be current on rent and credit card bills and able to show you have not been frequently late during the past two years.

However, there are some downsides to FHA loans.

First, you may not be able to get as much as you need. The maximum FHA loan of $729,750 applies only to the priciest parts of the country, like the Washington, D.C. area. In many places, the limit is $271,050. The FHA search tool will show the limit in your area.

Also, the insurance may be more costly than the private mortgage insurance you’d likely pay with an ordinary loan. The 0.5 percent monthly insurance must be paid for at least five years, even if the home value rises enough that the loan represents less than 80 percent of value.

With an ordinary loan, you could stop paying private mortgage insurance at that point. Of course, this may not be a big issue these days, since home prices are not rising.

Traditionally, another criticism of FHA loans is that they don’t offer all the options found with regular mortgages, like the right to make interest-only payments, or to pay less than you owe each month and have the difference added to your debt.

But, again, this may not matter. Exotic loans turned out to be too risky for many borrowers, and they’re pretty hard to find these days, anyway. The standard 15 and 30-year fixed-rate loans offered by FHA should be fine for most borrowers.

Find details on FHA loans on the agency’s web site. The site also has a search tool for locating approved lenders.

Most big lenders like Bank of America (Stock Quote: BAC) and Wells Fargo (Stock Quote: WFC) offer FHA loans, but you may have to talk to a local lending officer to get details.

It pays to shop around. FHA loan rates are often comparable to conventional rates, but not always. Wells Fargo, for instance, offers a conventional 30-year fixed-rate loan for 5.5 percent, but charges 6 percent for a comparable FHA loan. The conventional loan requires a 20 percent down payment, the FHA loan just 3.5 percent.

There’s no upfront insurance premium on the conventional loan, but Wells Fargo would charge just over $3,000 insurance for an FHA loan of $175,000. Monthly payments on a loan of that size would be $994 for the conventional loan, $1,147 for the FHA mortgage.

Before committing to an FHA loan, use the BankingMyWay.com shopping tool to find the best deal you could get with a conventional loan. It would be worthwhile to talk to a few conventional lenders, including your credit union if you have one, as some do offer loans with down payments of less than 20 percent.

Finally, use the Mortgage APR Calculator and Mortgage Points Calculator to see how upfront fees like points and insurance affect a loan’s desirability.

— For more ways to save, spend, invest and borrow, visit MainStreet.com.