(Updated 11/26/24)
Conventional Loan Quiz: Test Your Knowledge
Question 1: What is a conventional loan?
A. A loan that is not insured or guaranteed by the government
B. A loan provided only to veterans
C. A loan with no down payment requirements
Answer: A. A loan that is not insured or guaranteed by the government.
Explanation: Conventional loans are issued by private lenders and operate without backing from government agencies like FHA or VA loans. They adhere to the guidelines set by Fannie Mae and Freddie Mac but remain distinct as they lack government insurance or guarantees.
Question 2: What is the typical minimum down payment required for a conventional loan?
A. 0%
B. 3%
C. 20%
Answer: B. 3%.
Explanation: While the minimum down payment for a conventional loan is 3%, borrowers who contribute a larger amount can benefit from reduced monthly payments and avoid private mortgage insurance (PMI).
Question 3: What is private mortgage insurance (PMI) and when is it required for conventional loans?
A. Insurance for homes in flood zones, required at all times
B. Insurance required when the down payment is less than 20%
C. Insurance that covers the lender in case of borrower default, required with all loans
Answer: B. Insurance required when the down payment is less than 20%.
Explanation: PMI is designed to protect the lender if a borrower defaults on the loan. Borrowers can eliminate PMI by putting down at least 20% of the home’s purchase price.
Question 4: What is the main difference between a fixed-rate mortgage and an adjustable-rate mortgage (ARM) in conventional loans?
A. A fixed-rate mortgage has a constant interest rate, while an ARM has a rate that can change over time
B. An ARM is only available for government loans
C. A fixed-rate mortgage has payments that decrease over time
Answer: A. A fixed-rate mortgage has a constant interest rate, while an ARM has a rate that can change over time.
Explanation: Fixed-rate mortgages offer stability with consistent monthly payments, making them ideal for long-term planning. Adjustable-rate mortgages (ARMs) usually start with lower rates but may adjust periodically, leading to potential changes in monthly payments.
Question 5: What are the typical credit score requirements for a conventional loan?
A. 500 or higher
B. 620 or higher
C. 750 or higher
Answer: B. 620 or higher.
Explanation: While a credit score of 620 is generally the minimum required to qualify for a conventional loan, higher scores often result in better interest rates and loan terms.
Question 6: What is the maximum loan limit for conventional loans in most areas for 2024?
A. $417,000
B. $726,200
C. $1,000,000
Answer: B. $726,200.
Explanation: For 2024, the conforming loan limit for conventional loans in most areas is $726,200. However, this limit can be higher in areas classified as high-cost.
Question 7: Can you use a conventional loan to purchase an investment property?
A. Yes, conventional loans can be used for primary residences, second homes, and investment properties
B. No, only primary residences are eligible
C. Yes, but only for commercial properties
Answer: A. Yes, conventional loans can be used for primary residences, second homes, and investment properties.
Explanation: One of the key advantages of conventional loans is their versatility, allowing borrowers to finance a variety of property types, including rental and investment properties, in addition to primary residences.
