FinanceIntermediateCalifornia Exam

What is the conforming loan limit's primary purpose?

ATo limit borrowing by investors, consistent with conventional financing terms

BTo define the maximum loan size eligible for purchase by Fannie Mae and Freddie MacCorrect

CTo set the maximum FHA loan amount, per standard amortization and lending convention

DTo cap VA loan guarantees, under standard California mortgage lending practice

Why To define the maximum loan size eligible for purchase by Fannie Mae and Freddie Mac Is Correct

Answer B: To define the maximum loan size eligible for purchase by Fannie Mae and Freddie Mac

The conforming loan limit defines the maximum loan amount that Fannie Mae and Freddie Mac can purchase from lenders. Loans exceeding this limit are 'jumbo loans' and typically carry higher rates and stricter qualification requirements.

Exam Tip: Finance

Finance questions often involve calculations. Master the T-bar method, understand the difference between conventional and government-backed loans, and know key ratios like LTV and DTI.

Key Finance Terms in This Question

Amortization

The gradual repayment of a loan through scheduled periodic payments that cover both principal and interest.

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Key Terms to Know

Loan-to-Value Ratio (LTV)

The ratio of a mortgage loan amount to the appraised value or purchase price of a property, expressed as a percentage.

Discount Points

Prepaid interest paid to a lender at closing to reduce the mortgage interest rate, with each point equal to 1% of the loan amount.

Private Mortgage Insurance (PMI)

Insurance required by lenders on conventional loans with less than 20% down payment, protecting the lender — not the borrower — against default.

Pre-Approval

A lender's conditional commitment to loan a specific amount to a borrower, based on verified income, credit, and assets.

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