PSI Virginia Real Estate Practice Exam

What is a key requirement of conventional loans?

1. Guaranteed by the government

2. Available only to veterans

3. Not offered or secured by a government entity

4. Requires a 50% down payment

The correct answer is: Not offered or secured by a government entity

A key requirement of conventional loans is that they are not offered or secured by a government entity. Conventional loans are privately funded, typically by banks and other financial institutions, and they adhere to guidelines set by Fannie Mae and Freddie Mac, two government-sponsored enterprises. This means that these loans do not carry the backing of federal government programs like FHA, VA, or USDA loans, which offer guarantees or insurance to the lenders. The nature of conventional loans as being non-government-backed is significant because it generally results in stricter eligibility criteria for borrowers compared to government-insured loans. Borrowers usually need to have a higher credit score and may need to provide a larger down payment than what is commonly required for government-backed loans. Understanding this distinction is crucial for buyers and real estate professionals who navigate different financing options. Conventional loans can be more challenging to qualify for, but they often come with competitive interest rates and more flexibility with property types and use.