Why are FHA loans beneficial to lenders?

• A. They have higher interest rates
• B. They require no disclosures
• C. They must be originated by a government-approved lender
• D. They are insured by the federal government

Answer: (D)

The key idea is that FHA loans are insured by the federal government. That government backing protects lenders from losses if the borrower defaults, which lowers the lender’s risk on the loan. With reduced risk, lenders are more willing to originate these loans and can extend credit to a broader range of borrowers, such as those with smaller down payments or less-than-perfect credit. The borrower pays mortgage insurance premiums, which fund the insurance and keep the program running, but the important benefit to lenders is that the federal insurance cushion makes defaults less financially devastating. This insurance is why lenders favor FHA loans.