California Real Estate Practice Exam

Why might a Buyer be advised that an FHA loan does not allow for 2nd notes and trust deeds?

1. Because FHA prohibits any secondary financing

2. Because FHA requires full cash payment to close a loan

3. Because the 2nd note might confuse escrow officers

4. Because the transaction might alert the county recorder

The correct answer is: Because FHA prohibits any secondary financing

The rationale for advising a buyer that an FHA loan does not allow for secondary notes and trust deeds is primarily because the Federal Housing Administration (FHA) prohibits any form of secondary financing. This means that if a buyer is utilizing an FHA loan, they cannot simultaneously engage in additional financing that would be documented through a second note or trust deed. The purpose of this policy is to simplify the financing process and minimize risks associated with secondary debt that could affect the buyer's ability to repay the primary FHA loan. By prohibiting secondary financing, the FHA aims to enhance the security of its loans, ensuring that borrowers do not take on more debt than they can manage while also protecting the lender's interests. This regulation helps maintain the integrity of FHA-insured loans and ensures that they remain accessible for individuals who may have limited financial resources. Other options do not accurately reflect the binding regulations imposed by the FHA regarding secondary financing.