Loan Officer Practice Exam

What aspect does a conventional loan primarily focus on compared to VA or FHA loans?

1. lower down payment requirements

2. private mortgage insurance

3. guaranteed loan backing

4. higher loan limits

The correct answer is: private mortgage insurance

A conventional loan primarily focuses on private mortgage insurance (PMI), which is required when the down payment is less than 20% of the home’s purchase price. PMI protects the lender in case the borrower defaults on the loan. Unlike VA loans, which do not require mortgage insurance and are backed by the Department of Veterans Affairs, and FHA loans, which have their own mortgage insurance premiums, conventional loans allow for a more flexible approach toward insurance costs based on the borrower’s equity in the property. This is a significant distinction as it affects the overall costs associated with the loan and influences a borrower's decision-making when considering different types of mortgage options. Although other choices may touch on important aspects of the different loan types, they do not specifically address the core focus of conventional loans in relation to insurance. For instance, lower down payment requirements, guaranteed loan backing, and higher loan limits are features that can vary or are promoted more by FHA and VA loans but do not highlight the insurance implications that are paramount in conventional financing.