Quick answer
A conventional loan is not government backed and needs private mortgage insurance below 20 percent down. FHA is insured by the government, allows a low down payment, and carries mortgage insurance premiums. VA is guaranteed for eligible veterans with no down payment and no monthly mortgage insurance, but a funding fee. USDA serves eligible rural areas with no down payment.
Loan types come up throughout the real estate exam, and financing alone is 10 percent of the national portion. Georgia then adds its own wrinkle, because the instrument securing all of these here is a security deed rather than a mortgage, which the security deed guide covers.
The four programmes side by side
| Programme | Backing | Down payment | Mortgage insurance | Who qualifies |
|---|---|---|---|---|
| Conventional | None | Typically 3 to 20 percent | PMI below 20 percent down, cancellable | Anyone who qualifies on credit and income |
| FHA | Insured by FHA | Low | Upfront and annual MIP, often for the life of the loan | Owner occupants meeting FHA rules |
| VA | Guaranteed by VA | None required | None monthly, but a funding fee | Eligible veterans and service members |
| USDA | Guaranteed by USDA | None required | Guarantee and annual fee | Income and location eligible buyers |
Two distinctions the exam repeats.
Insured against guaranteed. FHA insures the lender against loss. VA guarantees a portion of the loan. Both protect the lender rather than the borrower, which surprises people. Mortgage insurance is not life insurance and does not pay the borrower anything.
PMI against MIP. PMI is private, attaches to conventional loans, and can be cancelled once enough equity exists. MIP is the FHA's own premium, charged upfront and annually, and on most current FHA loans it lasts the life of the loan unless the borrower refinances out.
Exam trap
A question describes a veteran buying with no money down and asks about monthly mortgage insurance. There is none on a VA loan. The funding fee is a separate, usually financed, upfront charge.
Conforming, jumbo and the secondary market
A conforming loan meets the standards Fannie Mae and Freddie Mac will buy, including a loan limit. A loan above the limit is a jumbo and stays outside those agencies, which usually means stricter terms.
The secondary market is where lenders sell loans to free up capital to lend again. Fannie Mae, Freddie Mac and Ginnie Mae operate there. The exam wants one idea from this: the secondary market provides liquidity. It does not lend to consumers, and a borrower never deals with it directly.
Fixed, adjustable, and the clauses inside them
A fixed rate loan keeps one rate for the term. An adjustable rate loan moves with an index plus a margin, subject to caps.
- The index is the market measure the rate follows. It moves.
- The margin is the lender's fixed add-on. It does not move.
- Caps limit the change per adjustment and over the life of the loan.
Three clauses show up constantly:
- Acceleration. On default, the lender can demand the whole balance now. Without it, the lender could only sue for missed payments.
- Alienation, also called due on sale. The balance comes due if the property is sold, which is what makes most modern loans non-assumable.
- Prepayment penalty. A charge for paying off early. Restricted on many loan types.
Assumption matters because FHA and VA loans can generally be assumed with lender approval, while conventional loans with a due-on-sale clause usually cannot. A VA seller who lets a non-veteran assume without a substitution of entitlement keeps their entitlement tied up, which is a real consequence the exam sometimes reaches for.
Amortisation, points and LTV
Amortisation means each payment covers interest first and the remainder reduces principal. Early in the loan almost all of the payment is interest. Over time the split reverses. Nothing about the payment amount changes on a fixed loan; only its composition does.
A discount point is one percent of the loan amount, paid upfront to lower the rate. Points paid on a $310,000 loan cost $3,100 each.
Loan to value is the loan divided by the lesser of price or appraised value. If a house is priced at $400,000 but appraises at $385,000, an 80 percent LTV loan is 80 percent of $385,000, not of $400,000. That distinction is a frequent question, and it is the reason a low appraisal creates a problem for the buyer rather than for the lender.
Worth knowing
A borrower's ratios matter as much as the programme. The front-end ratio compares housing cost to gross income. The back-end ratio compares total debt to gross income. Questions give you both and ask which one disqualifies the buyer.
The glossary entries for loan to value and discount point carry the exam's phrasing, and the calculators run the ratios and payment figures.
Check yourself
1. A buyer takes a conventional loan with 10 percent down. What will the lender require?
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Answer: B. Conventional loans below 20 percent down carry private mortgage insurance, which can be cancelled once sufficient equity exists.
2. A home is priced at $420,000 and appraises at $400,000. The lender will lend at 80 percent loan to value. What is the maximum loan?
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Answer: B. Loan to value uses the lesser of price or appraised value. 80 percent of $400,000 is $320,000, and the buyer must cover the gap.
3. Which clause makes the entire loan balance due if the borrower sells the property?
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Answer: C. The alienation clause, also called due on sale, is triggered by transfer of the property. Acceleration is triggered by default.
4. A borrower pays two discount points on a $285,000 loan. What is the cost?
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Answer: B. A point is one percent of the loan amount. One point is $2,850, so two points cost $5,700.
FAQ
Does FHA lend the money?
No. FHA insures loans made by approved lenders. The same is true of VA and USDA, which guarantee rather than lend. A borrower always deals with a private lender.
Can mortgage insurance be cancelled?
PMI on a conventional loan can be, once the loan reaches the required equity threshold. FHA MIP on most current loans lasts the life of the loan, and the usual way out is refinancing into a conventional loan.
What is the difference between prequalification and preapproval?
Prequalification is an informal estimate based on stated information. Preapproval involves verified documentation and a credit check, and it carries far more weight with a seller.
Does Georgia change any of this?
The programmes are federal and identical everywhere. What changes in Georgia is the instrument securing the loan, which is a security deed, and the intangible recording tax charged on the note.