California Real Estate Practice Exam

The primary source of funds for junior loans is:

1. FHA

2. Institutional lenders

3. Noninstitutional lenders

4. Private lenders

The correct answer is: FHA

The primary source of funds for junior loans primarily comes from noninstitutional lenders. Junior loans, which are subordinate to a first mortgage, often carry higher risks for lenders because they are second in line for repayment in the event of foreclosure. Noninstitutional lenders, which include private lenders and individual investors, are more willing to engage in these riskier lending scenarios compared to traditional institutional lenders such as banks or credit unions. FHA loans specifically pertain to government-backed loans designed to assist homebuyers, primarily for primary residences and are not focused on junior financing. Institutional lenders are generally more conservative and prefer first mortgages that provide lower risk. This makes them less likely to fund junior loans, as they may focus on securing their investment. Private lenders can play a significant role in providing junior loans, but often it is the broader category of noninstitutional lenders that represents the primary source, due to their flexibility and willingness to fund these riskier loans.