The discount points charged by a lender on a federal VA or FHA loan are calculated based on which amount?

The correct choice reflects that discount points are calculated based on the loan amount. Discount points are essentially a form of prepaid interest paid at closing, where each point typically costs 1% of the loan amount. In the context of federal VA or FHA loans, determining this amount based on the loan amount is crucial as it directly correlates to the financing that the buyer is obtaining.

For example, if a borrower is securing a loan of $200,000 and the lender charges 2 points, the cost for the points would amount to $4,000 (2% of the loan amount), which is based on the total amount borrowed rather than any other aspect of the transaction like the sales price, appraised value, or down payment. This approach aligns with the lending practices observed in both VA and FHA loans, ensuring that the calculation of points is tied to the actual funds that the borrower will repay.