Why are lenders willing to issue FHA loans at a lower interest rate compared to conventional loans?

The correct reason lenders are willing to issue FHA loans at a lower interest rate compared to conventional loans is that these loans are government-backed. This backing reduces the risk for lenders, as the government provides insurance on the loans, which ensures that the lender will be compensated even if the borrower defaults. Because of this reduced risk, lenders can offer more favorable terms, including lower interest rates.

The other options do not accurately capture this key aspect. For instance, while FHA loans do involve certain fees, such as mortgage insurance premiums, this does not inherently lead to lower interest rates. In fact, the insurance is a cost that borrowers pay but serves to protect the lender. Paperwork and credit score requirements are factors influencing loan issuance but do not correlate directly to why lenders might offer lower interest rates on FHA loans compared to conventional options. The main appeal for lenders lies in the security provided by the government backing, enabling a reduction in the interest rates offered to borrowers seeking FHA loans.