Loan types are core material in General Mortgage Knowledge, which is 20% of the national SAFE MLO test, and they show up again in origination and federal law questions. Expect fact patterns that ask which program fits a borrower, who insures or guarantees the loan, when mortgage insurance can come off, and what a VA or USDA borrower has to qualify for. The good news is that the programs follow a simple pattern once you sort them by who stands behind the loan.
This guide covers conventional, FHA, VA, and USDA loans the way the SAFE exam tests them, in plain English.
The big split: conventional vs. government-backed
A conventional loan is any mortgage that is not insured or guaranteed by a federal government agency. A government-backed loan has a federal agency standing behind part or all of the lender's loss if the borrower defaults. The exam wants you to match each program to its agency and to the right verb:
- FHA loans are insured by the Federal Housing Administration, which is part of HUD.
- VA loans are guaranteed by the Department of Veterans Affairs.
- USDA guaranteed loans are guaranteed by the U.S. Department of Agriculture through its Rural Development office.
None of these agencies normally lends the money on these programs. An approved private lender funds the loan, and the agency protects that lender. The one notable exception is the USDA Direct loan, covered below.
Conventional loans: conforming, jumbo, and nonconforming
Conventional loans are split by whether they can be sold to Fannie Mae or Freddie Mac, the two government-sponsored enterprises (GSEs):
- Conforming loans meet Fannie Mae or Freddie Mac underwriting guidelines and fall at or below the conforming loan limit, which the Federal Housing Finance Agency (FHFA) sets each year. Higher limits apply in high-cost areas.
- Jumbo loans are larger than the conforming loan limit, so the GSEs cannot buy them. They usually come with stricter credit, reserve, and down payment requirements.
- Nonconforming loans is the broader term for any conventional loan that does not meet GSE guidelines, whether because of size or because of other features.
Conventional loans can be made with as little as 3% down through GSE programs for qualified buyers, but the lender will require private mortgage insurance (PMI) when the loan-to-value ratio (LTV) is above 80%. PMI protects the lender, not the borrower.
Removing PMI: the Homeowners Protection Act
The Homeowners Protection Act of 1998 (HPA), sometimes called the PMI Cancellation Act, sets the rules for ending borrower-paid PMI on conventional loans for a primary residence. Learn three triggers, all measured against the original value of the home (the lower of the sales price or appraised value at closing):
| Trigger | Rule |
|---|---|
| Borrower request | The borrower may ask to cancel PMI when the balance is scheduled to reach, or actually reaches, 80% of original value, if they have a good payment history, are current, and meet any lender requirements such as showing the value has not declined. |
| Automatic termination | PMI must end automatically when the balance is scheduled to reach 78% of original value, as long as the borrower is current. |
| Final termination | PMI must end the month after the loan reaches the midpoint of its amortization (year 15 on a 30-year loan), if the borrower is current. |
The HPA does not apply to FHA or VA loans, and it does not cover lender-paid mortgage insurance, which is built into the interest rate and stays for the life of the loan. Lenders must also disclose the borrower's PMI cancellation rights at closing and once a year after that.
FHA loans
FHA loans are built for borrowers with smaller down payments or less-than-perfect credit. Key facts for the exam:
- Down payment: a minimum of 3.5% with a credit score of 580 or higher, and 10% with a score from 500 to 579.
- Occupancy: the borrower must live in the home as their primary residence. FHA loans can finance one- to four-unit properties.
- Loan limits: FHA sets maximum loan amounts that vary by county.
- Mortgage insurance premium (MIP): FHA charges an upfront MIP of 1.75% of the base loan amount, which can be financed into the loan, plus an annual MIP paid monthly.
- How long annual MIP lasts: with less than 10% down, for the life of the loan. With 10% or more down, for 11 years.
- Assumable: FHA loans can be assumed by a buyer who qualifies.
Watch the vocabulary. FHA mortgage insurance is MIP, and conventional mortgage insurance is PMI. Since the HPA does not cover FHA loans, the 78% automatic cancellation rule does not apply to FHA MIP.
VA loans
VA loans are a benefit for people who have served. Key facts:
- Who is eligible: veterans, active-duty servicemembers, and National Guard and Reserve members who meet service requirements, plus certain surviving spouses.
- Proof of eligibility: a Certificate of Eligibility (COE), which shows the borrower's entitlement.
- Down payment: usually none required when the borrower has enough entitlement and the price does not exceed the appraised value.
- No monthly mortgage insurance. Instead, most borrowers pay a one-time VA funding fee, which can be financed. The fee depends on the down payment and whether it is the borrower's first VA loan.
- Funding fee exemption: veterans who receive VA compensation for a service-connected disability are exempt, along with some other groups.
- Underwriting: the VA looks at residual income, the money left each month after major expenses, in addition to the debt-to-income ratio.
- Occupancy: the borrower must intend to live in the home.
- Assumable by a qualified buyer, and refinances can use the VA streamline refinance, the Interest Rate Reduction Refinance Loan (IRRRL).
A VA loan is guaranteed, not insured, and the VA does not set a maximum loan amount for borrowers who have full entitlement. The lender still decides how much the borrower qualifies for.
USDA loans
USDA Rural Development loans help low- and moderate-income buyers in eligible rural areas. Key facts:
- Location: the property must be in a USDA-eligible rural area. Many small towns and suburban edges qualify.
- Income limits: for the Guaranteed program, household income generally cannot exceed 115% of the area median income.
- Down payment: none required.
- Fees: an upfront guarantee fee and an annual fee, currently 1% and 0.35%, which work much like mortgage insurance.
- Occupancy: primary residence only.
- Direct loans: under the separate Section 502 Direct program, USDA itself lends to low- and very-low-income applicants. This is the main case on the exam where a government agency is the actual lender.
Side-by-side comparison
| Program | Backed by | Minimum down | Mortgage insurance or fee |
|---|---|---|---|
| Conventional | No agency (may be sold to Fannie Mae or Freddie Mac) | As low as 3% on some programs | PMI when LTV is above 80%, cancelable under the HPA |
| FHA | Insured by FHA (HUD) | 3.5% (580+ score) or 10% (500 to 579) | 1.75% upfront MIP plus annual MIP |
| VA | Guaranteed by the VA | Usually none | One-time funding fee, no monthly MI |
| USDA Guaranteed | Guaranteed by USDA Rural Development | None | Upfront guarantee fee plus annual fee |
Where the loans go after closing
The secondary market ties this together. Fannie Mae and Freddie Mac buy conforming conventional loans. Ginnie Mae, a government corporation within HUD, does not buy loans. It guarantees timely payment on securities backed by government loans such as FHA, VA, and USDA. If a question asks which entity is tied to government-backed loans, the answer is Ginnie Mae.
Common exam traps
- Insured vs. guaranteed: FHA insures. VA and USDA guarantee.
- Who lends: FHA, VA, and USDA Guaranteed loans are funded by private lenders. Only USDA Direct loans come from the agency.
- PMI vs. MIP: PMI is conventional and can be canceled under the HPA. MIP is FHA and follows FHA's own rules.
- 78% vs. 80%: 80% is when the borrower can ask. 78% is when it ends automatically. Both use original value.
- Jumbo means too big: a jumbo loan exceeds the conforming loan limit, so Fannie Mae and Freddie Mac cannot buy it.
- VA mortgage insurance: there is none. The funding fee is a one-time charge.
- Ginnie Mae: guarantees securities, does not buy loans, and works with government-backed loans only.
Three practice questions
1. A borrower with a 600 credit score wants the smallest possible down payment and does not qualify for VA or USDA. Which program fits, and what is the minimum down payment?
Answer: FHA, with 3.5% down. A score of 580 or higher qualifies for the 3.5% minimum. Below 580, the minimum rises to 10%.
2. A borrower bought a home for $300,000 with a conventional loan and PMI. They have never missed a payment. At what balance must PMI end automatically under the Homeowners Protection Act?
Answer: When the balance is scheduled to reach $234,000. That is 78% of the $300,000 original value. The borrower could have asked to cancel earlier, at $240,000, which is 80%.
3. Which of the following is true of VA loans? (A) They require monthly mortgage insurance. (B) They are insured by HUD. (C) The borrower needs a Certificate of Eligibility. (D) They are limited to rural areas.
Answer: C. VA loans require a Certificate of Eligibility, have no monthly mortgage insurance, are guaranteed by the VA rather than insured by HUD, and are not limited to rural areas. Rural area rules belong to USDA.
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