Massachusetts Real Estate License Practice Test

Which type of mortgage commonly requires insurance provided by private carriers to cover potential losses?

1. FHA Mortgage

2. VA Mortgage

3. Conventional Mortgage

4. Trust Deed Mortgage

The correct answer is: Conventional Mortgage

A conventional mortgage is typically one that is not insured or guaranteed by a government agency. However, lenders often require private mortgage insurance (PMI) for conventional loans when the borrower has a down payment that is less than 20% of the home's purchase price. PMI protects the lender against loss in the event that the borrower defaults on the loan. This insurance covers a portion of the lender's potential loss, enabling buyers who may not have a large down payment to qualify for a mortgage. In contrast, FHA mortgages are insured by the Federal Housing Administration, and VA mortgages are guaranteed by the Department of Veterans Affairs, which means they do not require private insurance but rather government-backed insurance. Trust deeds are not a type of mortgage but rather a method of securing a loan with property, often used in certain states. Thus, the nature of conventional mortgages inherently involves the necessity for private mortgage insurance when there's a higher risk due to a lower down payment.