FHA Loan Question

Hello, My wife and I are trying to get pre approved for a loan here in southern california and my credit is just above 640 and my wifes credit is a little under for being approved for an FHA loan. Originally I was going to just get the loan in my name and quit claim her on the deed. My Lender informed me that I cannot get the loan by my self because I don't make enough money and that we would need my wifes income as well. So we have been trying to get her credit up so we can get the FHA Loan. This past weekend her parents offered to co sign for us so we could go forward with buying a house. So I contacted my lender that I have been working with the past couple of months and what he told me really confused me. He said that we can do it that way but if we don't get our credit up then we would be buying the property as an investor and we would have to put 20% as a down payment. This makes no sense to me being that if I had 20% of the down payment I wouldn't need a co signer. Does this sound to you guys because it sounds pretty backwards to me being that if I just keep trying to get my wifes credit up enough to get the FHA loan then we would only have to put 3.5% down. Rather than go through the trouble of having her parents co sign and then in the end have to put 20% down which is out the door right away because I don't have $30,000 saved up at this point in time and if I did I would be paying off my wifes debt to get her credit up. Any advice would be greatly appreciated.