California Real Estate Practice Exam

A conventional loan would differ from an FHA loan in that the conventional loan would have:

1. Lower down payment requirements

2. Lower interest rates

3. Lower loan-to-value ratio

4. Lower monthly payments

The correct answer is: Lower down payment requirements

A conventional loan typically requires a higher down payment compared to an FHA loan. FHA loans are designed to help first-time homebuyers and those with less-than-perfect credit by allowing lower down payments, often as low as 3.5%. This makes FHA loans more accessible for borrowers who may not have the savings required for a conventional loan's typical minimum down payment of 5% to 20%. The significant difference in down payment requirements is rooted in the risk assessment and insurance mechanisms present in FHA loans, which protect lenders in case of default. Consequently, conventional loans generally appeal to borrowers who have more financial stability and can afford larger initial investments, while FHA loans are structured to accommodate more varied financial situations. Understanding these distinctions is crucial for prospective homebuyers to make informed decisions about the types of loans that best fit their financial capability and homeownership goals.