FHA as you have heard is coming back faster than ever.  FHA can be helpful in many ways when purchasing or refinancing.

I am currently working with clients that bought just over 1 year ago, with another mortgage lender, and they were put into a sub prime loan with a sub prime rate.  These clients at the time of their purchase did not have much of a choice after looking at their credit history.  They have had 2 Chapter 13 bankruptcies that were dismissed in the last 10 years, and a Chapter 7 that was discharged almost 2 years ago. 

When they came to me about refinancing I looked at the credit and knew this would not get an approval through automated underwriting with the past credit history.  At 1^st Advantage Mortgage, we have a DE FHA Underwriter.  (Delegated in house underwriter for FHA).  I had our underwriter review the credit for a manual underwrite to see if she would give it the thumbs up.  After reviewing the credit, she requested a letter of explanation as to why they had filed the 3 bankruptcies in the last 10 years before she could give it an ok. 

My clients have had some very rough spots obviously.  While trying to get a trucking business off the ground, the contracted with a company for their trucking needs.  The company was later found to have been smuggling drugs across state lines.  (My clients did not ever transport anything illegal)  Their largest client was now out of business and in jail.  Their business suffered and so did their bills. 

Fast forward to 2006 - They purchase their home with the sub prime mortgage, with a chapter 7 just one year from discharge.  Since then they have paid all their bills on time including their mortgage.  Their credit scores are in the mid 600's and would like to lower their interest rate and payments. 

FHA doesn't really care about your credit score, however they do care about your payment history, especially in the last 18 to 24 months.  With the letter written by my client and given to my underwriter for review she gave it a thumbs up.  Providing that the debt ratio was in line, they have reserves of 3 month PITI (principal, interest, taxes and insurance), and can provide all bankruptcy papers for all of the bankruptcy filings. 

In the end my clients will have a ton of documentation to provide, but they will receive a much lower interest rate and save approximately $300.00 on their monthly payments.

What is sad, is prior to contacting me, they spoke with a couple other mortgage lenders and banks that did not offer FHA, and did not work to help them find an option.  They were offered another sub prime loan at a rate higher than they are paying now, and a flat out denials prior to even completing a loan application. 

Working with a Mortgage Professional is important.  Work with someone who will work with you.  If you have credit issues ask how to work past it or correct it.  Ask how long before you may be able to apply for a mortgage based on your current credit history.  A Mortgage Professional should be able to answer your question and point you in the right direction to home ownership.

Also take a look at 

10 things you NEED to know about a refinance

10 more things you NEED to know in a refinance