Tennessee Realtor State Practice Exam

What type of mortgage market does the Federal Housing Administration primarily operate in?

1. The primary market.

2. The secondary market.

3. The federal market.

4. The community market.

The correct answer is: The primary market.

The Federal Housing Administration (FHA) primarily operates in the primary mortgage market, which involves the direct origination of loans between lenders and borrowers. In this context, the FHA provides insurance on loans made by approved lenders to borrowers, particularly first-time homebuyers or those with lower credit scores. This insurance protects lenders against potential defaults, which encourages them to offer loans with more favorable terms, such as lower down payments and interest rates. The primary market is where borrowers obtain mortgage loans directly from lenders. The funds in this market are used for the purchase of homes, making it crucial for both buyers looking to acquire property and sellers wanting to close transactions. While the FHA does not perform lending itself, it plays a critical role in supporting lenders who are active in the primary market by mitigating risk through its insurance programs. This ensures broader access to home financing for a wider range of consumers. Other types of markets mentioned do not accurately capture the FHA's operational focus. The secondary market involves the buying and selling of existing mortgages, which is distinct from the FHA's role in facilitating new loans. Neither the federal market nor the community market are recognized classifications in the realm of mortgage financing, making them less relevant to the question posed.