The FHA is a scam but not for the reason your friend mentioned. Look at the APR instead of the interest rate to find the true cost of the loan. An FHA loan, typically will have the best interest rate but the highest APR (by 1-1.5%) which is a better reflection of the true cost of the loan. However, when you start making the monthly payments, the FHA loan is actually higher than if you had a conventional loan. Your friend might be in an ARM. Fortunately, the rates are still historically low and hopefully refinanced by now into a Fixed rate.
Here are the cost consideration broken out when taking a FHA:
1) Upfront PMI is 1.7% (rates change frequently) of the principal amount of the loan. There is no upfront fee for PMI on conventional loans. This is several thousand dollars that is lost immediately and is added to the balance of the loan.
2) Monthly PMI is about 1.4% (rate change frequently) divided by 12. The PMI for conventional loans is about half as much. In fact, this is the reason that the monthly payment for the FHA loan is actually higher than if you had a conventional loan.
3) As of June 2013, the PMI for the FHA loan is now for the life of the loan. This was the biggest deal breaker for me and anyone considering this loan. This can cost you between $100-200k over the life of the loan.
4) If you refinance out of the FHA loan, the upfront PMI is not refundable.
5) If you refinance out fo the FHA loan, you have to pay the entire month of interest no matter when the new loan closes. This forces you to close on the new loan at the end of the month. Conventional loans prorate your interest when you refinance.
DO NOT USE THESE LOANS. Save an extra 1.5% to get a downpayment of 5% instead of the FHA minimum of 3.5%..