Two buyers cannot afford down payment on 3-unit residence. Government program requires mortgage default insurance, permits 3.5% down payment. They used:
Audio Lesson
Duration: 1:53
Question & Answer
Review the question and all answer choices
Conventional loan with Private Mortgage Insurance
A is incorrect because conventional loans with private mortgage insurance typically require higher down payments (usually 5-20%) and don't offer the 3.5% option for multi-unit properties. Private mortgage insurance is different from government-backed insurance.
Direct FHA loan with Mutual Mortgage Insurance
B is incorrect because FHA does not provide direct loans to borrowers. FHA insures loans that are originated by approved lenders, so there's no such thing as a 'direct FHA loan.'
VA-guaranteed loan with Mutual Mortgage Insurance
C is incorrect because VA loans do not require mortgage insurance and are only available to eligible veterans and active-duty service members. Additionally, VA loans don't typically apply to multi-unit investment properties.
FHA-insured loan from lender with Mutual Mortgage Insurance
Deep Analysis
AI-powered in-depth explanation of this concept
This question tests your understanding of government mortgage insurance programs and their structures, which is crucial for helping clients navigate financing options. The core concept involves distinguishing between different types of mortgage insurance programs and their providers. For a 3-unit property with a low down payment requirement, we need to identify which government program permits 3.5% down with mortgage default insurance. The question is challenging because it requires knowledge of FHA specifics versus other government programs. Option D is correct because FHA-insured loans are originated by lenders but insured by the government through Mutual Mortgage Insurance (MMI), allowing for the 3.5% down payment on multi-unit properties. This connects to broader knowledge of financing options available to buyers with limited down payments, which is essential for real estate professionals to properly advise clients.
Knowledge Background
Essential context and foundational knowledge
The Federal Housing Administration (FHA) was established in 1934 to improve housing standards and provide an adequate home financing system. The FHA-insured loan program allows borrowers to obtain financing with lower down payments and more flexible credit requirements than conventional loans. For multi-unit properties, FHA permits 3.5% down payments with mortgage insurance. The insurance is provided by the government through Mutual Mortgage Insurance (MMI), but the loans are originated by approved lenders, not directly by FHA. This structure makes homeownership more accessible while protecting lenders from default risk.
Think of FHA loans like a safety net provided by the government for lenders. The lender makes the loan, but the government stands behind it with insurance (MMI), allowing the lender to offer better terms to borrowers.
When you see 'FHA' on an exam, visualize a safety net - it's insurance that allows for more favorable terms like lower down payments.
For questions about low down payment government loans, look for 'FHA-insured loan from lender' as the correct structure. Remember FHA doesn't make direct loans but insures those made by approved lenders.
Real World Application
How this concept applies in actual real estate practice
A buyer approaches you looking to purchase a duplex as an investment property but only has 10% for a down payment. After discussing options, you determine they qualify for an FHA-insured loan. You explain that while FHA loans typically require 3.5% down, for multi-unit properties, they can finance up to 85% of the value with mortgage insurance. You connect them with an FHA-approved lender who can provide the loan with government-backed insurance, making the purchase possible with their available funds.
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