Massachusetts Real Estate License Practice Test

What type of mortgage is designed for ensuring home improvement loans against borrower default?

1. Conventional Mortgage

2. FHA Mortgage

3. VA Mortgage

4. Home Equity Loan

The correct answer is: FHA Mortgage

The FHA mortgage is specifically designed to increase accessibility to home financing, particularly for buyers who may have lower credit scores or limited savings. An FHA (Federal Housing Administration) mortgage allows borrowers to qualify for loans with lower down payments and more lenient credit requirements. Additionally, the FHA offers programs that allow homeowners to tap into their equity for home improvements through these loans. The FHA 203(k) program, for instance, enables borrowers to finance the purchase or refinance of a home and include the cost of improving or rehabilitating the property within the same loan. This makes the FHA mortgage particularly advantageous for those looking to make home improvements without requiring separate loans, ensuring that these funds are tied into the overall mortgage with protections against borrower default. In contrast, conventional mortgages typically do not offer the same level of support for those with lower credit profiles and are not specifically geared toward home improvement financing. VA mortgages are tailored for veterans and active-duty service members and also do not distinctly focus on home improvement loans. Home equity loans allow homeowners to borrow against the equity in their home but do not offer the same federal backing or protections designed to mitigate default risk as FHA loans do.