Massachusetts Real Estate License Practice Test

Which of the following is a characteristic of conventional mortgages?

1. Directly dependent on government regulations

2. Can include prepayment penalty clauses

3. Always require PMI

4. Are exclusively issued by credit unions

The correct answer is: Can include prepayment penalty clauses

Conventional mortgages are typically characterized by their flexibility and terms set by lenders rather than by government regulations, which is why the option regarding government dependency is inaccurate. Additionally, conventional loans do not always require private mortgage insurance (PMI); this requirement arises mainly when the down payment is less than 20%. The assertion that they are exclusively issued by credit unions is also misleading since conventional loans can be offered by a variety of financial institutions, including banks and mortgage companies. The presence of prepayment penalty clauses is a common feature in some conventional mortgages. This clause allows lenders to impose a penalty on borrowers who pay off their loan early, which compensates the lender for the lost interest income. Such clauses are not universal, but their inclusion can vary based on lender policies and specific loan agreements. Hence, the ability for conventional mortgages to include these penalties is a distinctive aspect of their structure.