Nationwide Mortgage Licensing System (NMLS) Practice Exam

Which type of loan typically does NOT require insurance?

1. Conventional loan

2. VA loan

3. FHA loan

4. Jumbo loan

The correct answer is: Conventional loan

The correct answer is that a conventional loan typically does not require private mortgage insurance (PMI) under certain conditions. Conventional loans are not government-backed and are often used when a borrower has a substantial down payment, typically 20% or more of the home's purchase price. When a borrower puts down 20% or more, they can often avoid needing PMI, which is typically required for loans with a smaller down payment to protect the lender against default. In contrast, VA loans are specifically designed for veterans and active military personnel, and they do not require mortgage insurance at all. Similarly, FHA loans generally require mortgage insurance regardless of the down payment amount to protect against default. Jumbo loans, which exceed the conforming loan limits set by Fannie Mae and Freddie Mac, usually do not require PMI if the borrower makes a large enough down payment. However, in many circumstances, lenders may still require insurance for jumbo loans due to the increased risk. Understanding these distinctions can help borrowers navigate their options and potentially save on costs associated with their loans.