Question 78

One of the primary functions of the Federal Housing Administration (FHA) is to insure home loans with high loan-to-value ratios.

The FHA primarily functions to insure home loans, particularly those with high loan-to-value ratios, which helps lenders mitigate risk and encourages them to offer loans to borrowers who might not qualify otherwise.

A) build low-income housing.

This option is incorrect as the FHA does not directly build low-income housing. Instead, it provides insurance on loans that can be used for purchasing homes, which may include low-income housing, but it is not a primary function of the administration.

B) make home loans with no down payments.

While the FHA does facilitate loans that often require low or no down payments, the primary function of the FHA is not to make loans directly but to insure them. Thus, this option does not capture the essence of the FHA's main role in the housing market.

C) insure home loans with high loan-to-value ratios.

This is the correct answer because the FHA’s primary role is to provide insurance on home loans, especially those with high loan-to-value ratios. This insurance protects lenders against losses, which in turn allows them to offer loans to a broader range of borrowers, including those with lower credit scores.

D) provide homeowner's insurance to high-risk home purchasers.

This option is incorrect as the FHA does not provide homeowner's insurance. Instead, it focuses on insuring mortgage loans, thereby helping lenders manage risk rather than offering direct insurance to homeowners.

Conclusion

The correct answer, C, highlights the FHA's crucial function of insuring home loans with high loan-to-value ratios, a practice that supports both lenders and borrowers. Other options incorrectly describe the FHA’s role, focusing on aspects like building housing or offering direct loans, which are not the primary functions of the administration. Thus, C accurately reflects the essential purpose of the FHA in the housing finance system.