Illinois Real Estate Practice Exam

Who supplies the money used for FHA loans?

1. Real estate brokers

2. Government agencies

3. Qualified lending institutions

4. Insurance companies

The correct answer is: Qualified lending institutions

The correct answer is that qualified lending institutions supply the money used for FHA loans. Federal Housing Administration (FHA) loans are designed to help borrowers, particularly those with lower credit scores or limited funds for a down payment, to secure financing for their homes. Although the FHA itself does not lend money, it insures loans made by qualified lending institutions such as banks, credit unions, and mortgage companies. This insurance mitigates the risk for lenders, encouraging them to provide financing to a broader range of borrowers. Lenders are thus willing to offer more favorable terms, such as lower down payments and interest rates, due to the backing provided by the FHA. This dynamic allows many individuals to achieve homeownership who might not qualify for conventional financing options. Other options, such as real estate brokers or insurance companies, do not directly supply the funds for FHA loans, as the brokers typically facilitate transactions rather than provide financing, and while insurance companies may offer mortgage products, they are not the primary funders for FHA loans. Government agencies, while involved in the overarching regulation and backing of FHA loans, do not directly supply the funds; rather, they ensure the program's existence and stability.