Certified Residential Appraiser Practice Exam

What distinguishes a Conventional Loan?

1. It is fully guaranteed by the federal government

2. It is insured against borrower default

3. It is not insured or guaranteed by a federal agency

4. It requires no credit check

The correct answer is: It is not insured or guaranteed by a federal agency

A Conventional Loan is characterized by its lack of insurance or guarantee from a federal agency. This means that the lender assumes the full risk of lending to the borrower without the backing of government programs like FHA or VA loans. Conventional loans are typically offered by private lenders and can be used for a variety of property types, often requiring stricter creditworthiness from borrowers compared to government-backed loans. The distinction lies in the absence of federal involvement in the loan's security, differentiating it from loans that do receive government backing, which often have specific eligibility requirements and protections for lenders against borrower default. This absence of insurance can also result in different terms concerning down payments and interest rates, reflecting the level of risk the lender is willing to take on. Choosing a Conventional Loan typically appeals to borrowers with strong credit histories and financial stability, as they can secure favorable terms without the necessity of additional federal program involvement.