PSI Virginia Real Estate Practice Exam

What distinguishes FHA insured loans from conventional loans?

1. FHA loans are only for first-time buyers

2. FHA loans require private mortgage insurance

3. FHA loans are insured by the Federal Housing Administration

4. FHA loans require a higher down payment

The correct answer is: FHA loans are insured by the Federal Housing Administration

The distinguishing factor of FHA insured loans compared to conventional loans is that they are insured by the Federal Housing Administration. This insurance provides lenders with a safety net, which makes them more willing to offer loans to borrowers who may have lower credit scores or smaller down payments than what is typically required for conventional loans. This government backing allows FHA loans to be more accessible to a broader range of homebuyers, particularly first-time buyers or those with less-than-perfect credit. In contrast, the other options present features that either do not accurately describe FHA loans or do not differentiate them sufficiently from conventional loans. For instance, while FHA loans often appeal to first-time buyers, they are not exclusively for that group, as other buyers can also qualify. The requirement for private mortgage insurance (PMI) is associated with conventional loans under certain conditions, while FHA loans have a particular mortgage insurance structure that differs from traditional PMI. Lastly, FHA loans generally allow for a lower down payment compared to many conventional loans, making homeownership more attainable for many borrowers.