What is the primary function of an FHA loan program?
Correct Answer
B) To insure approved lenders against loss if a borrower defaults on the loan
The Federal Housing Administration (FHA) does not make loans directly to borrowers. Instead, it insures FHA-approved lenders against losses in the event a borrower defaults. This government backing allows lenders to offer loans with lower down payments (as low as 3.5%) and more flexible qualifying criteria, making homeownership more accessible. Borrowers pay mortgage insurance premiums (MIP) to fund this insurance program. VA loans, not FHA loans, are designed specifically for eligible military veterans.
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Related Concepts
A VA loan is a mortgage guaranteed by the Department of Veterans Affairs available to eligible veterans, active-duty service members, and surviving spouses. It offers no down payment and no private mortgage insurance requirements.
An adjustable-rate mortgage (ARM) has an interest rate that changes periodically based on market conditions, typically after an initial fixed-rate period. The rate adjustment is tied to a financial index plus a margin.
Closing costs are the fees and expenses paid by the buyer and seller at the closing of a real estate transaction, beyond the purchase price. They typically range from 2-5% of the purchase price.
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