Chapter 5: Loan Programs: Conventional, FHA, VA, USDA, Jumbo, and Choosing the Right Product for Each Borrower

"There is no best loan. There is only the best loan for the borrower in front of you, and finding it is most of what you are paid for." — constructed; the argument of this chapter

Overview

A borrower calls and says they want "a conventional loan," and what they mean is "a normal loan, the kind regular people get." A different borrower says they were told to "avoid FHA," usually by somebody who does not know why. A third has been told by a real estate agent that their VA benefit "makes sellers reject your offer," which is both common advice and something close to malpractice.

The programs are not tiers. They are not better and worse. They are different answers to different problems, built at different times for different borrowers, and the entire skill of §5.10 is matching them.

This chapter is the map. It is deliberately at altitude: enough to hold a competent first conversation, choose a shortlist, and know what you do not yet know. Part III comes back and takes the government programs apart properly — Chapter 16 is FHA, Chapter 17 is VA and USDA — and Chapter 13 is where the decision actually gets made on the Linden Street file.

One warning before we start, and it governs everything here. Almost every number in this chapter is revised on a schedule. Conforming loan limits change annually. FHA limits change annually. Mortgage insurance factors change. The VA funding fee schedule has been amended repeatedly. USDA's fees are set each year. A book that prints this year's figures as though they were permanent teaches you a habit that will eventually cost you a deal.

So: learn the structure. Learn why a limit exists, how it is set, and what it does to a file that crosses it. Then go get the current number.

In this chapter, you will learn to:

• Place any residential loan on a five-category map
• Distinguish conventional from conforming, and say what crossing the limit does
• Summarize FHA, VA, and USDA eligibility and cost, and name the borrower each was built for
• Explain the four mortgage insurance structures and state which terminates when
• Describe an ARM in terms of index, margin, caps, and the fully indexed rate
• Apply a decision tree and defend the result

Learning Paths

🎓 Exam — all of it. Program knowledge is a large share of the "general mortgage knowledge" section. §5.7 and §5.8 are the most heavily tested, and the MI terminology in §5.8 is a favorite trap. 🏠 New LO — §5.8 and §5.10. Most first-year mistakes are program-fit mistakes. 🤝 Partner — §5.3, §5.4, and §5.9. If you sell real estate, §5.4 will change how you advise sellers about VA offers. 📊 Operations — §5.2, §5.6, §5.9. Eligibility is where files get suspended.

5.1 The map: agency, government, jumbo, portfolio, non-QM

Five categories. Every residential mortgage in the United States is one of them, and the difference between them is who is going to buy the loan — which, as Chapter 1 established, is the fact that determines everything else.

THE FIVE CATEGORIES — organized by who buys the loan

  ┌─────────────────────────────────────────────────────────────────────┐
  │ AGENCY / CONVENTIONAL CONFORMING                                    │
  │ Buyer: Fannie Mae or Freddie Mac                                    │
  │ Rules: the Selling Guides. Uniform, public, free to read.           │
  │ ~The bulk of the market. Best pricing. Tightest documentation.      │
  └─────────────────────────────────────────────────────────────────────┘
  ┌─────────────────────────────────────────────────────────────────────┐
  │ GOVERNMENT — FHA, VA, USDA                                          │
  │ Buyer: securitized through GINNIE MAE                               │
  │ Rules: HUD 4000.1, the VA lender's handbook, the USDA handbook      │
  │ Insured or guaranteed by an agency. Serves borrowers agency         │
  │ conventional lending will not.                                      │
  └─────────────────────────────────────────────────────────────────────┘
  ┌─────────────────────────────────────────────────────────────────────┐
  │ JUMBO / NON-CONFORMING                                              │
  │ Buyer: private-label securitization, or a bank's own balance sheet  │
  │ Rules: the investor's, or the bank's. Not public.                   │
  │ Above the conforming limit. Tighter credit, more reserves.          │
  └─────────────────────────────────────────────────────────────────────┘
  ┌─────────────────────────────────────────────────────────────────────┐
  │ PORTFOLIO                                                           │
  │ Buyer: NOBODY — the lender keeps it                                 │
  │ Rules: entirely the lender's own                                    │
  │ Maximum flexibility, because there is no investor to satisfy.       │
  │ Usually priced for that flexibility.                                │
  └─────────────────────────────────────────────────────────────────────┘
  ┌─────────────────────────────────────────────────────────────────────┐
  │ NON-QM                                                              │
  │ Buyer: specialized investors                                        │
  │ Rules: the investor's. Ability-to-Repay STILL APPLIES.              │
  │ Alternative documentation — bank statements, assets, DSCR.          │
  │ Not "no-doc." Chapter 34.                                           │
  └─────────────────────────────────────────────────────────────────────┘

Two observations that pay off repeatedly.

Pricing generally follows liquidity. Agency conforming loans have the deepest, most liquid market, and they price best. Jumbo pricing is sometimes competitive with agency and sometimes not, depending on bank appetite. Non-QM prices well above agency because the investor base is thin and the risk is real. When a borrower asks why a program costs more, the honest answer is usually "because fewer people want to buy this loan."

Rules follow the buyer. Agency guidelines are public and free — you can read exactly why a file was declined. Jumbo and portfolio guidelines are not public, which means the answer to "why?" is sometimes "because that investor says so," and there is no document you can show the borrower. This is genuinely frustrating and worth knowing in advance.

What the map does not hold

A borrower will ask you about a loan that is not on that diagram, usually inside your first month. "Can you do a construction loan?" "My mother is asking about a reverse mortgage." "The house needs a roof — is there something that covers the repairs?" "My credit union offered me a line of credit."

None of those is a sixth category. Every one of them already sits somewhere on the map, and placing it correctly is most of the answer:

Two of those placements are worth saying out loud on the phone, because getting them wrong wastes a week. A temporary buydown is not a program; it is money placed in an escrow account to subsidize the first year or two of payments on a loan that is otherwise an ordinary fixed-rate mortgage, and the borrower is still qualified at the note rate. And a renovation loan is sized on a value that does not exist yet, which means an appraiser has to opine on a house that has not been built — a different appraisal product, a longer turn time, and a contractor whose bids become part of the loan file.

Why the boundaries move

The five categories look permanent on a page. They are not. The line between them is drawn by a number and a rulebook, and both get revised.

A jumbo loan becomes a conforming loan when the conforming limit rises past it — which happens, for most of the country, every January. A non-QM borrower becomes an agency borrower the day a waiting period after a credit event expires. A portfolio program becomes an agency program when Fannie Mae or Freddie Mac decides to buy that kind of loan. And the traffic runs the other way too: an overlay added by your own employer in a nervous quarter can push a file you closed last year into a category you can no longer originate.

The practitioner consequence is small and useful. A file's category is a fact about today. A borrower you could not help in October may be an ordinary agency file in January, and the loan officer who wrote the reason down and set a reminder gets that loan. The one who said "you don't qualify" and closed the record does not.

🎓 NMLS Exam Watch

The word "conventional" means not government-insured or guaranteed. It does not mean conforming, and it does not mean 20% down. A \$1.4 million jumbo loan is conventional. A 3%-down Fannie Mae loan is conventional. An FHA loan is not.

"Government loan" means FHA, VA, or USDA — insured or guaranteed by a federal agency. Note that Fannie Mae and Freddie Mac loans are not government loans despite the GSEs' federal charters, and this is exactly the distinction the test probes.

5.2 Conventional and conforming

Conventional means the loan is not insured or guaranteed by a government agency.

Conforming means it meets Fannie Mae's or Freddie Mac's requirements for purchase — including, most visibly, a maximum loan amount.

The conforming loan limit

The conforming loan limit is set annually by the Federal Housing Finance Agency, adjusted for changes in house prices. There is a baseline limit that applies in most of the country and a high-cost area limit — up to 150% of the baseline — in designated counties, with special provisions for Alaska, Hawaii, Guam, and the U.S. Virgin Islands. Limits also rise with unit count: a two-unit property has a higher limit than a one-unit.

For the examples in this book, assume a baseline one-unit limit of \$806,500. Confirm the current figure at the FHFA before you quote it to anyone. It changes every year, in November, for the following year.

Loans above the baseline but within a high-cost area limit are commonly called high-balance and carry their own pricing adjustments — they are conforming, but they cost more than a standard conforming loan.

How the limit is actually set, and why the mechanism matters

The limit is not a policy judgment made fresh each year by someone deciding what a reasonable house costs. It is an index calculation. The FHFA tracks house prices and moves the baseline limit by roughly the same percentage that prices moved, then announces the following year's figure in November. High-cost counties get a limit derived from local median values, subject to a statutory ceiling of 150% of the baseline, and a handful of jurisdictions — Alaska, Hawaii, Guam, and the U.S. Virgin Islands — sit under special provisions. Limits also step up with unit count, so a duplex carries a higher limit than a single-family home and a fourplex higher still.

Three consequences follow from the mechanism, and all three are things you will actually use.

The limit moves in the direction prices moved, with a lag. In a year when values rose, next year's limit rises, and some files that were jumbo in December are conforming in January. That is worth a phone call to a borrower you could not place at 95% loan-to-value in the fall.

The limit is a county number, not a metro number. Two properties eight miles apart can sit in different counties with materially different limits. Nothing about the neighborhood tells you which; you look it up.

The limit applies to the loan amount, not the price. A borrower buying at \$900,000 with 25% down has a \$675,000 loan and is nowhere near the limit. A borrower buying at \$860,000 with 5% down is over it. Price is not the test. The loan amount is the test, which is why the check has to happen after you know the down payment and not before.

High-balance is a third thing, not a rounding error

New loan officers tend to hold two categories in their head — conforming and jumbo — and treat high-balance as a technicality. It is not. It behaves like its own product.

A high-balance loan is still conforming: Fannie Mae or Freddie Mac will buy it, the Selling Guide governs it, and you can read the rule that declined it. But it carries separate price adjustments layered on top of the ordinary ones, some investors decline to buy it at all, and lender overlays on high-balance loans are more common and more restrictive than on standard conforming. It is entirely normal for a shop to price high-balance a quarter point or more worse than the same borrower's standard conforming loan, and for a second lender to price it competitively. That spread is real money and it is worth shopping internally before you quote.

The trap in the middle of all this is the county-line problem. A borrower is pre-approved for a loan amount that clears the high-cost limit in the county where they started looking. They then find a house in the adjacent county, where the limit is the baseline. Nothing about the borrower changed, nothing about the loan amount changed, and the file is now jumbo. This is not exotic; in high-cost metropolitan areas it happens constantly, because a metropolitan area is exactly the thing that straddles county lines.

The discipline is one line in your notes: the limit belongs to the property, not to the borrower. Until you have an address, you do not have a limit.

⚠️ Where Deals Die

The loan amount that crosses the limit by \$1,200.

A borrower is buying at \$860,000 with 5% down. Loan amount \$817,000. Assume the local limit is \$806,500. The loan is **\$10,500 over**, which means it is not conforming — and jumbo programs at 95% loan-to-value are scarce, tightly underwritten, and much more expensive. A file the borrower was told was routine is now difficult.

The fixes, and none of them is free:

Fix	What it costs
Increase the down payment by \$10,500	cash, and reserves
Renegotiate the price	the seller may say no
Split into a first at the limit plus a second lien	complexity, and second-lien pricing
Go jumbo	tighter credit and reserve requirements, worse pricing at high LTV

The discipline: know your local limit, and check the loan amount against it before you issue a pre-approval letter. This is a thirty-second check that prevents a category of disaster, and it is the reason §5.10's decision tree asks about loan amount second.

What conventional conforming requires

Directional, not definitive — verify against the current Selling Guide and your employer's overlays:

The 3%-down programs — Fannie Mae's HomeReady and Freddie Mac's Home Possible, and the standard 97% LTV products — deserve a note, because loan officers routinely forget they exist. They carry income limits in some cases, may require homebuyer education, and offer reduced mortgage insurance coverage requirements that can make them cheaper than an FHA loan for a borrower with decent credit. Chapter 33 covers them properly.

When the price moves after the pre-approval

The callout above describes a file that was over the limit from the beginning. The more dangerous version is the file that was comfortably under the limit when you checked, and crossed it later, because nobody checks a number twice that was fine the first time.

Four things move a purchase price after a pre-approval letter goes out. An escalation clause in a competitive offer bids the price up automatically. A renegotiation after inspection can move it either way. On new construction, change orders and option selections are added to the contract price weeks after it was signed, and a buyer who upgrades the kitchen and adds a finished basement has changed your loan amount without telling you, because to them it was a decorating decision. And a seller concession or price adjustment written by addendum rewrites the number the loan is computed on.

THE ESCALATION THAT CROSSED THE LINE            [constructed teaching example]
  Assume a local one-unit conforming limit of $806,500 — verify the current figure at FHFA.

  PRE-APPROVAL, WEEK 1
    Target price          $780,000
    5% down                $39,000
    Loan amount           $741,000     <- $65,500 under the limit. Nobody worries.

  OFFER ACCEPTED, WEEK 3 — escalation clause topped out
    Contract price        $850,000
    5% down                $42,500
    Loan amount           $807,500     <- $1,000 OVER. The file is no longer conforming.

  THE FIX
    Down payment          $43,500      (an extra $1,000)
    Loan amount           $806,500     <- conforming again
    LTV                     94.88%     ($806,500 / $850,000)

One thousand dollars. That is the entire difference between an ordinary 95% conforming loan and a 95% jumbo file, and 95% jumbo programs are scarce, slow, and expensive where they exist at all. A borrower who has just won a bidding war at \$850,000 can find \$1,000. What they cannot do is find it on day forty-three, when the loan officer finally recomputes and discovers that the pre-approval and the contract describe two different loans.

The habit: recompute the loan amount against the limit every time the price changes, and add one sentence to your pre-approval letter — that the letter is issued at a stated purchase price and must be re-run if the price moves. It costs you nothing and it converts a catastrophe into a phone call.

5.3 FHA

The Federal Housing Administration does not lend. It insures lenders against loss on loans meeting its standards, in exchange for premiums paid by the borrower. Chapter 2 explained where this came from; Chapter 16 covers the handbook in detail.

The borrower FHA was built for: someone whose credit or down payment does not clear conventional requirements, or whose ratios need more room than conventional pricing will tolerate.

All FHA factors and limits above are illustrative. Verify current figures with HUD.

What FHA is actually underwriting for

The outline table above lists what FHA permits. It does not explain what FHA is looking at, and that is where the program's real character lives.

An FHA file is scored through the TOTAL Scorecard, run inside Fannie Mae's Desktop Underwriter or Freddie Mac's Loan Product Advisor. The scorecard returns either an Accept or a Refer, and the difference between those two words is the difference between two entirely different loans.

An Accept buys ratio room. It is the reason FHA files routinely close at back-end ratios that would be unrecognizable under the manual benchmark, and it is why the 31%/43% figures in the outline table are labeled as a manual benchmark rather than a limit. Chapter 15 takes the scorecard apart; for now, learn the shape: the machine has looked at the whole file — score, reserves, payment shock, residual capacity — and decided the ratios are supportable.

A Refer sends the file to a human, and manual FHA underwriting is a genuinely different exercise. The benchmark ratios apply. Exceeding them requires documented compensating factors, and the word that matters is documented: verified reserves, a demonstrated history of paying a housing payment of similar size, or residual income are compensating factors; a good feeling about the borrower is not. Manual underwriting also draws the credit history into much sharper focus — payment patterns, the reasons behind derogatory events, and whether the borrower's problems are behind them or ongoing.

Three screens run alongside the credit decision, and each one has killed files that looked clean:

• Delinquent federal debt. FHA borrowers are checked against a federal credit alert system for delinquent obligations to the government — a defaulted student loan, a prior FHA claim, certain other federal debts. A hit is disqualifying until it is resolved, and resolving it is not a three-day process.
• The property itself. FHA appraisals carry minimum property requirements: the house has to be safe, sound, and sanitary. Peeling paint on a pre-1978 home, a missing handrail, an inoperable furnace, or a roof at the end of its life can turn an appraisal into a repair list, and the repairs have to happen before closing. Chapter 16 and Chapter 18 cover this properly. On the first call it is enough to know that on an FHA file the house has to qualify too.
• Waiting periods after credit events. Bankruptcy, foreclosure, short sale, and deed in lieu each carry a defined seasoning period with an exception path. The periods are set in HUD Handbook 4000.1 and they change; Chapter 14 works them. Never quote one from memory.

The honest summary of FHA's credit posture: it is more forgiving of the past and no more forgiving of the present. A borrower with a discharged bankruptcy four years ago, rebuilt credit, and a 620 score is squarely FHA's borrower. A borrower who is thirty days late right now is nobody's.

🧮 Run the Numbers

The Linden Street borrowers as an FHA file. [the Linden Street file]

	Conventional 95%	FHA 96.5%
Down payment	\$19,250.00 | **\$13,475.00**
Base loan	\$365,750.00 | \$371,525.00
UFMIP at 1.75%, financed	—	\$6,501.69
Total loan	\$365,750.00 | **\$378,026.69**
Note rate	6.625%	6.250%
P&I	\$2,341.94 | **\$2,327.58**
Monthly MI / MIP	\$176.78 | **\$173.26**
Taxes + insurance	\$515.00 | \$515.00
PITI	\$3,033.72** | **\$3,015.84
Back-end ratio	42.66%	42.49%

On both numbers a borrower asks about, FHA wins. It is \$17.88 a month cheaper and needs \$5,775.00 less cash down.

Hold that thought until §5.8, which contains the reason the answer is not FHA.

(Illustrative rates and MI factors; verify current figures.)

The borrower FHA was actually built for

Run that comparison on the Linden Street file often enough and you can start to think of FHA as the program that loses. It is not. It lost that comparison because those borrowers had five percent down, a 706 representative score, and reserves left over — which is to say, because they did not need what FHA does.

Here is the file that does. [the Harlow Street file]

Look at what conventional lending would have to do with that file. A 641 score is at or below most conventional minimums. A 51.00% back-end ratio is a stretch anywhere. And the borrower is not bringing the down payment — a county down-payment assistance program is, as a forgivable second lien that pushes the combined loan-to-value above the purchase price.

That file closes on FHA and closes nowhere else. It is approvable because the TOTAL Scorecard returns an Approve/Eligible on the strength of compensating factors, and it would fail the 31%/43% manual benchmark outright. Chapter 16 underwrites it properly and Chapter 33 works the assistance layering; Chapter 8 is where the borrower nearly walks away, twice.

Two things about that file are worth carrying into every FHA conversation you have.

FHA's mortgage insurance is the price of admission, not a penalty. This borrower will pay MIP for the life of the loan and it is still, unambiguously, the right loan — because the alternative was not a cheaper loan, it was renting. The \$38,155.54 comparison in §5.8 is a real cost and it is not a verdict on the program. It is a verdict on one file, where the borrower had the cash and chose not to use it.

FHA's mortgage insurance is not priced off credit score. Conventional mortgage insurance is: the premium a private mortgage insurer charges rises, sometimes steeply, as the representative score falls. FHA's annual MIP factor varies by loan-to-value, loan amount, and term — not by score. A 620-score borrower and a 780-score borrower with the same structure pay the same MIP. That single structural fact is why FHA wins comparisons at the bottom of the credit range and loses them at the top, and §5.8 comes back to it.

FHA's forgotten feature: assumability

An FHA loan is generally assumable by a buyer who qualifies. So is a VA loan. Conventional loans, with narrow exceptions, are not — they carry a due-on-sale clause the lender will enforce.

For most of the last two decades that was a footnote, because rates were low and falling and nobody wanted to inherit an old loan. In a market where existing loans carry rates well below what is available today, it stops being a footnote. A seller with a 3% FHA loan is holding an asset a buyer would very much like to have, and a listing agent who understands that has something to advertise.

Three limits keep assumptions rarer than the arithmetic suggests, and you should know all three before you raise the subject with anyone:

• The buyer has to qualify. An assumption is an underwritten transaction. The servicer runs credit, income, and assets, and the buyer can be declined.
• The equity gap has to be covered in cash or a second lien. The buyer assumes the balance, not the price. On a home that has appreciated substantially, the difference between the two is enormous, and financing it wipes out much of the benefit of the low first-lien rate.
• The seller wants a release of liability. Without an approved release, the original borrower can remain liable on a loan secured by a house they no longer own. That is a serious exposure and it is the reason a seller's attorney will read the assumption package carefully.

Servicers also vary widely in how quickly they process assumptions, which is a scheduling risk somebody has to own. Verify the current requirements with HUD and with the servicer holding the loan — assumption rules are program rules and they change.

5.4 VA

The Department of Veterans Affairs guarantees a portion of a loan made to an eligible veteran, service member, or surviving spouse. It is, in this author's view, the best-designed loan program in American lending, and it is the one most often mishandled.

Funding fee percentages are illustrative and have been amended repeatedly. Verify the current schedule with the VA.

Entitlement, in the terms the borrower will ask about

Entitlement is the one VA concept that reliably confuses everyone, including loan officers, and the confusion is almost always the same confusion: borrowers hear "entitlement" and think it means "how much house the VA will let me buy." It does not. Entitlement is how much of the loan the VA will guarantee to the lender, and the lender's willingness to lend with nothing down follows from it. The guaranty is what stands in the place of a down payment.

Four practical facts, in the order a borrower asks about them:

"Am I eligible?" Eligibility comes from service and is documented by a Certificate of Eligibility (COE). Not by a DD-214 alone, not by the borrower's recollection, not by a photograph of a service medal. Pull the COE early — it is usually fast, occasionally not, and a file waiting on one is a file that is not moving.

"Can I use it more than once?" Yes. The benefit is not a one-time coupon. It is reusable, and plenty of veterans finance three or four homes across a career with it.

"I already have a VA loan. Can I get another?" Sometimes — this is where entitlement stops being an abstraction. An outstanding VA loan consumes part of the entitlement, and what remains determines whether a second VA loan is possible and whether it requires a down payment. Entitlement is restored when the prior loan is paid off, which normally happens at sale, and there are limited paths to restoration without a sale. A veteran carrying an existing VA loan on a house they are keeping as a rental is an extremely common file, it is often doable, and the arithmetic is not something to attempt on the phone.

"Is there a limit?" The relationship between entitlement and county loan limits was changed materially by federal legislation effective in 2020, and it is now one of the most commonly misremembered points in the program — including by experienced originators repeating what was true when they learned it. Verify the current rule with the VA before you quote a maximum to anybody. Chapter 17 works entitlement, restoration, and the second-use arithmetic properly.

One more mechanic that surprises sellers and their agents: because VA loans are assumable, a veteran whose loan is assumed by a non-veteran buyer generally leaves their entitlement tied up in that loan until it is paid off. The veteran sold the house and did not get the benefit back. That is a real consideration for anyone thinking about marketing an assumable VA loan, and it is one more reason the assumption package deserves a careful reading rather than an enthusiastic one.

Residual income — the test nobody else runs

Every other program in this chapter qualifies a borrower on ratios: percentages of gross income. VA does that too, and then does something else that no agency or government program does. It asks how many dollars are left.

Residual income is what remains from gross monthly income after federal and state taxes, the new housing payment, all other monthly obligations, and an estimated allowance for maintenance and utilities based on the square footage of the subject property. The required minimum varies by geographic region and family size, published in tables the VA maintains and revises. Look them up in the VA Lender's Handbook every time; do not carry them in your head.

Why it is a better test than a ratio, in one sentence: 43% of \$4,000 and 43% of \$14,000 are the same percentage and not remotely the same life. A household earning \$14,000 a month at a 45% back-end ratio has thousands of dollars left after everything; a household earning \$4,000 a month at the same ratio may have a few hundred. The ratio cannot see that. Residual income can, and it is the reason VA files sometimes approve at back-end ratios that would stop a conventional underwriter cold — and, less often but importantly, the reason a VA file with a comfortable ratio can still fail.

The two outcomes both happen and both matter:

• Pass the ratio, fail residual. A large household in a high-cost region, buying a big house with a large utility footprint. The percentage looks fine; the dollars are not there.
• Fail the ratio, pass residual — decisively. A high-income household above the ratio guidance with residual income far above the requirement. Strong residual is a documented compensating factor, and it is the single most useful one on a VA file.

Appendix A carries the formula and Chapter 17 works a full residual calculation. What belongs in your head at this stage is the idea: VA is the program that asks what is left, not what percentage was spent.

🧮 Run the Numbers

What the VA benefit is actually worth on this file. [the Linden Street file, counterfactual]

Suppose one borrower were an eligible veteran. Zero down, funding fee of 2.15% financed:

	Conventional 95%	VA 100%
Down payment	\$19,250.00 | **\$0.00**
Funding fee, financed	—	\$8,277.50
Loan amount	\$365,750.00 | \$393,277.50
Note rate	6.625%	6.375%
P&I	\$2,341.94 | \$2,453.54
Monthly MI	\$176.78 | **\$0.00**
Taxes + insurance	\$515.00 | \$515.00
PITI	\$3,033.72** | **\$2,968.54
Back-end ratio	42.66%	42.04%

A larger loan produces a smaller payment — \$65.18 less — because there is no mortgage insurance. And the borrower keeps \$19,250 in cash.

(Illustrative funding fee and rate; verify the current schedule with the VA.)

⚖️ Compliance Check

Two things a loan officer must be able to say out loud.

First: "VA offers get rejected" is not a reason to steer a veteran away from their benefit. The claim circulates among real estate agents and is largely folklore built on the program's reputation from decades ago. VA appraisals and property requirements are real and can add friction. They do not justify a loan officer discouraging an eligible borrower from using an entitlement they earned. Discouraging an application also has fair-lending implications — military status is a protected characteristic in some state laws, and the Servicemembers Civil Relief Act and related protections apply. Chapter 25.

Second: ask every borrower about military service. Not "are you a veteran" once, in passing. The eligible population includes National Guard and Reserve members with qualifying service, and surviving spouses — and a surviving spouse very frequently does not know they are eligible. Missing this costs a borrower tens of thousands of dollars and is entirely preventable by one question asked properly.

Verify current requirements with the VA and your compliance department.

⚠️ Where Deals Die

The eligible borrower who never mentioned the Guard.

This is the most expensive question a loan officer fails to ask, and it fails in a completely predictable way. The application asks whether the borrower is a veteran. The loan officer reads it off the screen — "and you're not a veteran, right?" — the borrower says no, and the file becomes a conventional loan with a down payment and mortgage insurance.

The borrower was not lying. They served six years in the National Guard, drilled one weekend a month, deployed once, and left at twenty-six. They are forty-eight now. They do not call themselves a veteran, nobody has ever called them one, and the word on the screen did not describe the person they think they are. The eligible population is much wider than the word "veteran" reaches: active duty, National Guard and Reserve members with qualifying service, and surviving spouses — who very frequently have no idea the benefit exists at all, because the person who earned it is the person who would have known.

What it costs. On a file the size of Linden Street, §5.4's counterfactual prices it: the borrower keeps \$19,250.00** they would otherwise have handed over at closing, pays **\$65.18 a month less, and pays no monthly mortgage insurance at all — against \$24,218.86 of mortgage insurance on the conventional option, in exchange for a financeable funding fee of \$8,277.50 that a veteran receiving compensation for a service-connected disability would not pay either.

The fix is a script, not a policy. Stop asking the yes/no question. Ask the open one, of every borrower, every time, and ask it about the household rather than the person:

"Has anyone in your household — you, your spouse, a late spouse — ever served in the military in any capacity? Active duty, Guard, Reserve, any branch, any length of time?"

Then, if the answer is anything other than a flat no, pull the Certificate of Eligibility and let the VA decide. You are not qualified to rule out eligibility from a conversation, and you do not have to be. That question takes eleven seconds and it is worth tens of thousands of dollars several times a year.

What the VA benefit does not do

Enthusiasm for this program is warranted and it should not curdle into overselling, because a borrower who was promised something the program does not deliver stops trusting everything else you said. Five honest limits:

It is not a first-time-buyer program. There is no such restriction. Nor is it a one-time benefit, and nor is it limited to a particular price range.

It is not free. The funding fee is real money — financeable, and real. Exemptions apply and they matter enormously, but a veteran with no exemption pays it, and it should appear in your very first conversation rather than in a disclosure three days later.

It is not a waiver of credit standards. The VA publishes no minimum credit score, which is not the same as saying no score is required. Lender overlays commonly impose one, and they vary by shop. A borrower declined for score on a VA loan at one lender may well be approvable at another, which is worth knowing before you tell a veteran they cannot use their benefit.

It does not exempt the property. VA appraisals are ordered through the VA's own system, come back as a Notice of Value, and carry property requirements comparable in spirit to FHA's. A house with a failing roof does not become acceptable because the buyer served.

It is not zero closing costs. VA restricts certain charges a veteran may pay, which is a genuine borrower protection and also something your operations team has to structure around. Verify the current list of allowable and non-allowable charges in the VA Lender's Handbook — this is precisely the kind of rule that gets revised.

5.5 USDA

USDA Rural Development guarantees loans in designated areas, for borrowers under an income limit.

Fees and income limits are set annually. Verify current figures with USDA.

Two things loan officers get wrong about USDA.

"Rural" is broader than it sounds. Eligible areas frequently include the outer suburbs of mid-size metropolitan areas — not only farmland. The map is the authority and it is worth checking rather than assuming.

The income limit is a household limit, not a qualifying-income limit. It counts income from household members who are not on the loan. A borrower who qualifies comfortably on their own income can be ineligible because of an adult child's earnings. This catches people, and it is the kind of thing that surfaces on day thirty if you did not ask on day one.

Two maps and two tests

USDA is the only program in this chapter where the property has to be eligible before the borrower does, and the eligibility is geographic. That means every USDA conversation runs two independent screens, and a file has to pass both.

Screen one: the property. USDA publishes an eligibility map. You enter the address; it tells you yes or no. There is no judgment involved and no arguing with it. What there is, and what catches people, is that the map gets redrawn. Eligible areas are reviewed against population data on a schedule, and areas that have grown lose eligibility — sometimes with a published effective date months in the future. A property that is eligible today and ineligible in six months is a real scenario, and a borrower shopping slowly can lose the program while they look.

Screen two: the household. Income is capped for the household, commonly stated as a percentage of area median income for the county and household size. The limits are reset annually.

The practitioner rule is simply to run both on the first call, from the actual address and the actual household roster, and to write down the date you checked. "I looked at the map in March" is not a defensible answer in September.

Whose income counts — the same household, two different answers

This is the part that produces the day-thirty surprise, so it is worth laying out flat. USDA uses two different income figures for two different purposes, and they are almost never the same number.

• Repayment income — the documented, stable income of the people actually on the loan. This is what qualifies the borrower and drives the ratios. It behaves the way income behaves on every other program in this chapter.
• Annual household income — the income of all adult members of the household, on the loan or not, used to test program eligibility. USDA then applies defined deductions to reach an adjusted figure. The deductions exist, they are specific, and their values are revised; look them up rather than estimating.

Watch what that does to an ordinary family. [constructed teaching example]

The applicant qualifies on \$4,600.00 a month. The **program eligibility test looks at \$103,800, before adjustments — more than double. Nothing about that is a trick; it is what a household income limit means. But it is invisible to a loan officer who asks "what do you make?" and stops there, and it is why the USDA intake question is not about the borrower at all:

"Who else lives in the home, and does any adult in the household have income?"

Ask it on day one. The version of this file that dies is the one where a nineteen-year-old's job at the distribution center surfaces on day thirty, after the appraisal is paid for.

Guaranteed is not Direct

One last distinction, because borrowers conflate them and the answer changes what you say next. USDA runs two single-family programs.

The guaranteed program is the one this chapter is about and the one you originate: you make the loan, USDA guarantees it, and the borrower applies to you.

The direct program is a loan made by USDA itself, aimed at low- and very-low-income households, with a payment subsidy and its own income tiers and application process. The borrower applies to the agency, not to you. A borrower whose income is well below the guaranteed limit may be better served there, and the professional answer when you suspect it is to say so and point them to the agency office rather than to quietly originate the loan you can be paid on. Chapter 26's compensation rules are the formal version of that instinct; the informal version is that the referral comes back.

5.6 Jumbo and non-conforming

A jumbo loan exceeds the conforming loan limit for its area and unit count. It cannot be sold to Fannie Mae or Freddie Mac, so it goes to a private investor or stays on a bank's balance sheet.

The consequences are consistent, if not universal:

That last row deserves emphasis. On an agency file you can look up the rule and show the borrower. On a jumbo file the guideline lives in an investor's matrix that you may be able to summarize and cannot hand over. When a jumbo file is declined for a reason that seems arbitrary, sometimes it is arbitrary, and "let me try another investor" is a real and often correct response.

Jumbo pricing is not automatically worse than agency. Banks that want jumbo assets for their own balance sheets — often to build relationships with high-balance depositors — sometimes price aggressively, occasionally below agency. Do not assume; check.

Non-conforming is a bigger word than jumbo

The two terms get used interchangeably and they are not the same. Jumbo means big. Non-conforming means the agencies will not buy it — for any reason at all. Loan amount is only the most visible one.

A loan of perfectly ordinary size becomes non-conforming when:

• The property is not eligible. A condominium project that fails review, a working farm, a property with substantial commercial space, a house on many acres where the land dominates the value, a cabin without year-round access. The borrower can be immaculate and the collateral still disqualifies the file.
• The documentation is not eligible. A self-employed borrower qualified on twelve months of bank statements, a retiree qualified by depleting assets, an investor qualified on the property's rent rather than personal income. None of that is agency documentation; all of it is real lending. Chapter 34 owns it.
• A credit event is still inside its waiting period. A borrower two years past a foreclosure is not an agency borrower yet. They may well be a portfolio or non-QM borrower today, and an agency borrower on a specific future date you can calculate and put in your calendar.
• The structure is unusual. A term the agencies do not offer, a lien position they do not buy, a borrowing entity they will not lend to.

Say this out loud on the phone once and it will save you a hundred future misunderstandings: "This isn't about the size of your loan. It's about who's willing to buy it."

Reserves are the real gate on a jumbo file

Loan officers new to jumbo lending brace for the credit score and the down payment. Those are usually the easy part. The requirement that actually kills jumbo pre-approvals is reserves, and it kills them late, because nobody asked the question early.

Reserves are verified liquid assets remaining after closing, measured in months of PITI. Agency files often require few or none. Jumbo files can require many, sometimes counted separately for other properties the borrower owns. Watch the size of the number this produces. [constructed teaching example]

WHAT A JUMBO FILE ACTUALLY ASKS THE BORROWER TO HAVE   [constructed teaching example]

  Purchase price            $1,200,000
  Down payment, 20%           $240,000
  Loan amount                 $960,000
  Rate (illustrative)           6.875%   30-year fixed

  P&I                         $6,306.52
  Taxes                       $1,250.00
  Homeowners insurance          $310.00
  ------------------------------------------
  PITI                        $7,866.52

  RESERVE REQUIREMENT, at three plausible investor postures:
     6 months  ->  $47,199.12
    12 months  ->  $94,398.24
    18 months  -> $141,597.36

  Total liquid needed at 12 months' reserves, with $18,000 of closing costs:
    $240,000.00 + $18,000.00 + $94,398.24  =  $352,398.24

  Reserve requirements vary enormously by investor, loan amount, and LTV.
  Get YOUR investor's number before you issue a pre-approval letter.

The borrower in that example has \$240,000 for a down payment and thinks the hard part is over. Depending on the investor, they may need another \$94,398.24 sitting in an account after the wire goes out. That is a different conversation entirely, and it has to happen in week one.

Two refinements worth knowing now. Not everything counts, and not all of it counts fully — retirement accounts are typically counted at a discount to reflect taxes and penalties, vested but unexercised equity compensation often does not count at all, and a gift that funded the down payment is generally not also available as reserves. And reserves are frequently required on other financed properties, so a borrower with three rentals may face a requirement computed on four PITIs rather than one.

The declined jumbo, and the second look

When an agency file is declined, the reason is in a public guideline and there is usually one correct answer. When a jumbo file is declined, the reason lives in an investor's matrix, and a different investor may simply have a different matrix.

That makes "let me take this to another investor" a legitimate and often correct response rather than a stall — and it is one of the genuine advantages of working somewhere with several jumbo outlets. Chapter 31 covers what that flexibility is worth and what it costs.

It has limits, and they are worth stating so you do not learn them the hard way. Shopping a file is not the same as shopping a borrower's credit — you work from the same report and the same package, you do not re-pull credit at four lenders, and you do not submit the same file everywhere at once and sort it out later. And when three investors decline for the same reason, the reason is real. At that point the honest move is to tell the borrower what the obstacle is, whether it is fixable, and how long fixing it would take.

5.7 Fixed vs. adjustable: index, margin, caps

A fixed-rate mortgage has one rate for the whole term. Nothing about the interest rate can change.

An adjustable-rate mortgage (ARM) has an initial fixed period, then adjusts periodically. Four terms describe it completely.

ARM names describe the structure: a 5/6 ARM is fixed for five years, then adjusts every six months. A 7/6 is fixed for seven. Caps are quoted as three numbers — 2/1/5 means 2% at the first adjustment, 1% at each subsequent one, 5% over the life.

🧮 Run the Numbers

A 5/6 ARM on the Linden Street loan — and the number that qualifies the borrower. [constructed teaching example]

Initial rate 5.875%. Index 4.25%, margin 2.75% → fully indexed rate 7.00%. Caps 2/1/5.

	Rate	P&I
Initial (the rate they would pay for five years)	5.875%	\$2,163.55
Fully indexed — the rate they must QUALIFY at	7.00%	\$2,433.34
After a maximum first adjustment (+2.00)	7.875%	\$2,651.94
At the lifetime cap (+5.00)	10.875%	\$3,448.62

Two things to read off this table.

The borrower is qualified at \$2,433.34, not \$2,163.55. Under the Ability-to-Repay rule a creditor must qualify an ARM at the higher of the fully indexed rate or the initial rate — the direct answer to Chapter 2's 2/28 disaster. So the ARM's lower initial payment does not help the borrower qualify. That surprises people, and it removes the main reason borrowers ask for ARMs.

The worst case is \$1,285.07 a month above the initial payment. That is the number to show a borrower before you show them the 5.875%. §5.7's rule: worst case first.

(Illustrative index, margin, and rates.)

When an ARM is genuinely right

The product exists for good reasons (Chapter 2, §2.5) and it is right for some borrowers:

• A short, known horizon. Military orders, a residency ending in four years, a documented plan to sell. If the borrower is gone before the first adjustment, the fixed period is all that matters.
• An expectation of substantially higher income, documented rather than hoped for.
• A large expected principal reduction — a borrower who will pay the loan down sharply.
• When the spread is genuinely large. In some rate environments the ARM/fixed spread is trivial, and taking rate risk for 0.125% is a bad trade. In others it is a point or more.

And when it is wrong: when the borrower needs the lower payment to make the budget work. That is precisely the borrower who cannot survive the adjustment, and the ATR qualifying rule exists to stop it.

What the "6" in "5/6 ARM" changed

A borrower who took an ARM before the index transition will tell you they have "a five-one." They may well be right, and it is not the same product you are quoting them.

Under the old LIBOR-indexed conventions, the second number was years: a 5/1 ARM was fixed for five years and adjusted once a year afterward. Current SOFR-indexed products are built to adjust every six months, so the second number became months and the names became 5/6, 7/6, and 10/6.

The initial fixed period is identical. What changed is the back half: after the fixed period ends, the new loan repositions twice as often as the loan the borrower is remembering. Caps still constrain each move, and the caps on a six-month product are typically smaller per adjustment to account for the higher frequency — which is exactly why you read the actual cap structure rather than assuming 2/1/5. It is a genuine difference in the borrower's experience of the loan and it takes ten seconds to explain. Say it before they discover it.

The ARM terms nobody explains until closing

Index, margin, caps, and the fully indexed rate describe an ARM completely enough to compare two of them. They do not describe it completely enough to answer the questions a borrower asks in year six. Six more terms live in the note, and each one has a number in it:

Two structural prohibitions belong here as well, because they are exam material and they are the scar tissue from Chapter 2. Negative amortization — a payment structure that does not cover the accruing interest, so the balance grows — is incompatible with the Qualified Mortgage definition. So is an interest-only payment feature. Both were ordinary before 2008, both are now outside QM, and a loan that carries either sits in the non-QM category with everything that implies.

One more piece of housekeeping that is easy to skip: Regulation Z requires that ARM applicants receive the Consumer Handbook on Adjustable-Rate Mortgages — the CHARM booklet — along with program disclosures. Handing over a booklet does not discharge your obligation to explain the loan, and the borrower's memory of the conversation is what determines whether they trust you in year six.

A note on how the table in this section was computed. The four payments above are all calculated on the original loan amount over the full 360-month term, which is the convention this book uses so that four rates can be compared on one line. A real ARM re-amortizes the remaining balance over the remaining term at each adjustment, so the post-adjustment figures on an actual note will differ somewhat. The comparison is honest; the precision is illustrative. Say so when you show it to a borrower, because they will eventually see the real number.

5.8 Mortgage insurance across the programs

This section is the most misunderstood material in residential lending and the answer to §5.3's cliffhanger.

Mortgage insurance protects the lender, not the borrower. The borrower pays for it. It exists so that a lender will accept a loan-to-value above 80% — which, as Chapter 2 explained, is the invention that made low-down-payment lending possible at all.

Four structures. They are not interchangeable and the terminology is tested.

The shape of the four structures

Read that table as a picture rather than a grid and the whole comparison becomes obvious. What distinguishes these programs is not how much they charge per month. It is how long they charge it.

MORTGAGE INSURANCE ACROSS 360 PAYMENTS — the shape of each structure
  Schematic. Not to scale. A bar means a monthly charge is being collected.

  CONVENTIONAL, LTV > 80%   ████████████████████████░░░░░░░░░░░░░░░░░░░░
  (PMI)                     |<- to 78% of ORIGINAL value ->|  then $0
                            upfront: usually none (single-premium options exist)

  FHA, LTV > 90%            ████████████████████████████████████████████
  (annual MIP)              |<----------- the life of the loan ---------->|
                            upfront: UFMIP, financed into the loan

  FHA, LTV <= 90%           ██████████████████████░░░░░░░░░░░░░░░░░░░░░░
  (annual MIP)              |<----- 11 years ----->|  then $0
                            upfront: UFMIP, financed into the loan

  VA                        ░░░░░░░░░░░░░░░░░░░░░░░░░░░░░░░░░░░░░░░░░░░░
  (funding fee only)        no monthly charge, ever
                            upfront: funding fee, financeable, exemptions apply

  USDA                      ████████████████████████████████████████████
  (annual fee)              |<----------- the life of the loan ---------->|
                            upfront: guarantee fee, financeable

  payment 1                                                    payment 360
  Durations illustrative — verify current rules with HUD, USDA, and the insurer.

Three readings come straight off that diagram and all three are things borrowers ask.

VA is the only structure with no monthly charge at all. That is the benefit, in one line, and it is why §5.4's counterfactual produces a larger loan with a smaller payment.

Two of these never end. FHA above 90% loan-to-value and USDA both charge for the life of the loan. A borrower who plans to keep the house for thirty years is signing up for thirty years of the charge, and there is no milestone at which it stops.

Only one of them has a switch the borrower can flip. Conventional PMI terminates by operation of law, and — as this section will show — by a route the borrower can also trigger deliberately. That optionality is worth real money and almost nobody is told it exists.

⚖️ Compliance Check

Never call FHA's MIP "PMI." They are different charges, under different authority, with different termination rules. The Homeowners Protection Act's 80%/78% rules govern borrower-paid private mortgage insurance on conventional loans and do not apply to FHA.

A loan officer who tells an FHA borrower "your PMI comes off at 78 percent" has given advice that is wrong in a way the borrower will discover eleven years from now. This is the single most common substantive misstatement made to FHA borrowers, and the exam tests it directly.

Verify current MIP duration rules with HUD; they have been changed before and can be changed again.

The FHA MIP duration rule — the thing that decides §5.3's question

For FHA loans with terms greater than 15 years, annual MIP duration depends on the loan-to-value at origination. The rule, in its commonly stated form:

Illustrative — verify current rules with HUD.

That table is the reason the answer to §5.3 is not FHA.

The 90% line is a cliff, not a slope

Read that two-row table carefully, because almost everyone reads it as a gradient and it is not one. There is no sliding scale between eleven years and thirty. There is a line, and the loan lands on one side of it.

[constructed teaching example] On a \$300,000 purchase:

\$19,500 of additional down payment changes the duration of the mortgage insurance by nineteen years. Nothing in between does anything: 90.01% is treated exactly like 96.5%. A borrower sitting at 90.4% loan-to-value who could reach 90.0% with a few thousand dollars more is, on the current rules, being handed one of the highest-return decisions available in this entire book, and it is invisible unless somebody runs it.

Two facts about that line that produce most of the mistakes:

It is measured at origination, and only at origination. The duration is fixed on the day the loan closes. A borrower on a life-of-loan FHA file who pays the balance down to 60% of value has not shortened anything. There is no threshold they can reach by paying, no request they can file, no milestone that arrives. The only exits are refinancing out of FHA or paying the loan off entirely.

Notice how close eleven years is to conventional's own timeline. The Linden Street conventional option terminates at payment 137 — eleven years and five months. FHA's eleven-year rule at 90% or less lands in almost exactly the same place. Which means the enormous cost difference this chapter is built around is not a fact about FHA generally. It is a fact about FHA above 90% loan-to-value, which is where the overwhelming majority of FHA loans are written, because the borrower who has ten percent to put down usually was not the borrower who needed FHA.

🧮 Run the Numbers

The \$38,155.54 answer. [the Linden Street file]

The FHA option looked better on both numbers a borrower asks about: \$17.88 a month cheaper, \$5,775.00 less down. Now price the mortgage insurance over the life of the loan.

	Conventional 95%	FHA 96.5%
Monthly MI / MIP	\$176.78 | \$173.26
Terminates	payment 137 (78% of original value)	never — LTV was above 90%
Months paid	137	360
Total MI paid	\$24,218.86** | **\$62,374.40
Difference	—	\$38,155.54

The FHA loan is \$17.88 a month cheaper and costs \$38,155.54 more in mortgage insurance. Both are true. Which one matters depends on how long the borrower keeps the loan, whether they will refinance out of it, and whether the \$5,775 of down-payment relief is what makes the purchase possible at all.

This is the book's first theme in one table, and it is why Chapter 13 exists. A loan officer who quotes the monthly payment and stops has given the borrower the worse answer while being perfectly accurate.

(Illustrative factors; verify current figures with HUD and the mortgage insurers.)

Where "payment 137" comes from

That table asserts a month. A borrower will eventually ask where it came from, and an underwriter or a servicer certainly will, so it is worth knowing that payment 137 is one of several doors and not the only one.

The Homeowners Protection Act governs borrower-paid private mortgage insurance on conventional loans on a principal residence. It provides three separate exits.

Door 1 — cancellation on the borrower's request, at 80%. When the balance reaches 80% of the original value, the borrower may request cancellation in writing. On the Linden Street file the amortization schedule reaches \$308,000 — 80% of the \$385,000 original value — at payment 125. The request is not automatic and it is not unconditional: the servicer can require a good payment history, no subordinate liens, and in some circumstances evidence that the value has not declined.

Door 2 — automatic termination, at 78%. When the balance reaches 78% of the original value on the scheduled amortization, the servicer must terminate the coverage without being asked, provided the borrower is current. On this file the balance reaches \$300,300 at payment 137. That is the figure the chapter uses, because it is the one that happens by itself.

The gap between those two doors is twelve payments — twelve months of \$176.78, or \$2,121.36 on this file, that a borrower who wrote a letter would not have paid. Nobody tells them. You can.

Door 3 — final termination at the midpoint. For a borrower who is current, coverage terminates at the midpoint of the amortization period regardless of the balance — payment 180 on a 360-month loan. This is the backstop for a loan whose schedule would otherwise never reach 78%, and on an ordinary fully amortizing fixed-rate loan it is never the binding door.

Then there is the door that is not in the statute at all, and it is the one worth the most money.

The investor door — cancellation based on CURRENT value. Fannie Mae and Freddie Mac permit cancellation of mortgage insurance based on a new appraised value, subject to seasoning requirements, loan-to-value thresholds that vary with how long the loan has been held, and a clean payment history. In an appreciating market this can arrive years before payment 137, because it does not care what the house was worth at closing.

Hold those two ideas apart, because confusing them is the second most common mortgage-insurance error after calling MIP "PMI":

The current requirements, seasoning periods, and thresholds are set in the Selling Guides and are revised. Verify them before you advise anyone. What you should carry permanently is the shape: a borrower in an appreciating market may be able to remove mortgage insurance long before the schedule says so, and they will never find out unless someone tells them. That phone call, made to a past client in year three, is worth more to your business than most of the marketing in Chapter 38.

🧮 Run the Numbers

When does FHA actually become the expensive option? [the Linden Street file]

The \$38,155.54 is a lifetime figure, and lifetime figures hide their own timing. FHA's monthly MIP on this file is \$173.26** against conventional's **\$176.78 — so FHA is \$3.52 a month cheaper, every single month it is charged. Run the cumulative totals and watch where the crossover actually lands.

Through payment	Conventional MI paid	FHA MIP paid	Who is ahead
60 (5 years)	\$10,606.80 | \$10,395.60	FHA, by \$211.20
120 (10 years)	\$21,213.60 | \$20,791.20	FHA, by \$422.40
137 (conventional MI terminates)	**\$24,218.86** | \$23,736.62	FHA, by \$482.24
139	\$24,218.86 | \$24,083.14	FHA, by \$135.72
140	\$24,218.86** | **\$24,256.40	CONVENTIONAL, by \$37.54
360	\$24,218.86 | \$62,374.40	CONVENTIONAL, by \$38,155.54

The FHA loan is the cheaper loan on mortgage insurance for its first one hundred thirty-nine payments. At payment 140 — eleven years and eight months in — conventional passes it, and from that month forward the gap grows by \$173.26 every single month for another two hundred twenty payments.

That is the entire argument of this section in one line: the difference is not a monthly problem, it is a duration problem, and it arrives after the borrower has stopped thinking about it.

Convention: the book holds the FHA annual MIP constant at \$173.26 for this arithmetic. The actual premium recalculates on the declining balance each year, which is why the published lifetime figure of \$62,374.40 is not exactly 360 × \$173.26. State the convention when you show this; do not silently multiply.

The three cases where the answer flips

The \$38,155.54 makes conventional look like the obvious answer, and on the Linden Street file it is. On three other files it is not, and a loan officer who has memorized one conclusion will get all three wrong.

Before working them, one correction that the rest of the book depends on. \$38,155.54 is the mortgage-insurance difference. It is not the total-cost difference. FHA's note rate on this file is 0.375% lower than conventional's, which claws a substantial amount of it back in interest, and the upfront treatment differs as well. The complete accounting — mortgage insurance, interest, and upfront charges, netted — belongs to Chapter 13, which builds it line by line. Say "\$38,155.54 more in mortgage insurance," never "\$38,155.54 more." The unqualified version is the single easiest way to mislead a borrower while quoting a correct number.

Case 1 — the borrower who will sell in five years.

Read the crossover table again at payment 60. Over five years the FHA file pays \$211.20 less in mortgage insurance, and the borrower kept \$5,775.00 at closing that the conventional file required. The lifetime penalty never arrives, because the loan does not live that long.

The honest complications, both of which you state out loud: the financed UFMIP is repaid out of the sale proceeds, so it is deferred rather than avoided; and five-year plans are a statement of intention, not a fact. Ask what the plan is built on. A documented reason — a residency ending, a transfer cycle, a lease-up on a rental they already own — is a plan. "We'll probably move at some point" is a mood, and a borrower who holds the loan on a mood pays the full duration penalty.

Case 2 — the borrower who will refinance out of it.

This is the most common answer given to the MIP-duration objection and it is the one most often given carelessly. It contains a trap.

An FHA streamline refinance keeps the borrower in FHA — and therefore keeps them in MIP. Escaping mortgage insurance means refinancing to a conventional loan, which requires three things simultaneously: enough equity, credit that qualifies, and a rate environment that makes the new loan worth doing. You control none of them. An FHA refinance also charges a new upfront premium, with a partial refund of the old one available only in limited circumstances — verify the current rules with HUD.

So the sentence to say is not "you can always refinance out of it." It is: "There is a way out, and it depends on rates in a few years, which nobody can promise you. So let's decide whether this loan works if that never happens." If the answer is yes, the plan is sound. If the answer is no, you have just found out that the file is thinner than it looked.

Case 3 — the borrower whose credit is the problem.

This is the case that reverses the conclusion outright, and it rests on a structural fact stated in §5.3 and worth repeating because it is the most useful generalization in program selection:

Conventional mortgage insurance is priced off the borrower's credit score. FHA's mortgage insurance is not.

A private mortgage insurer sets its factor from the representative score, the loan-to-value, the coverage percentage, and the term. As the score falls, the factor climbs — and at the bottom of the conventional credit range it can climb steeply. FHA's annual MIP factor varies by loan-to-value, loan amount, and term, and treats a 620 and a 780 identically. Conventional pricing moves the same direction: the rate adjustments for score worsen as the score falls, while FHA's rate is far less score-sensitive.

Both effects push the same way. The result is a genuine crossover in the borrower population:

That is the Harlow Street file from §5.3, and it is why that file is an FHA file and is not a close call.

One belief to correct while you are here, because borrowers hold it and it is wrong on both programs: improving your credit score after closing does not lower your mortgage insurance. Neither program re-prices the premium mid-loan. The factor is set at origination and it stays. What improved credit buys you is a better refinance — which is a different loan, with its own costs, at whatever rates exist that year.

📞 On the Phone

Explaining life-of-loan MIP to a borrower who needs the loan.

This conversation goes wrong in two opposite directions. Say nothing and you have withheld the most important term of the loan. Say it badly — "the mortgage insurance never goes away" — and you have frightened a borrower out of the only financing that gets them into a house.

Borrower: "Wait. It never comes off? For thirty years?"

What works: "Let me give you the real shape of it, because it's important and it isn't as bad as it sounds when you first hear it.

On this loan the mortgage insurance is about ninety-seven dollars a month, and at your down payment it's built to stay for the life of the loan. That's the honest headline and I'm not going to soften it.

Here's the part that matters, though. Two things usually happen before thirty years. Most people refinance or sell well before then — and if you refinance into a conventional loan later, once you've got some equity, the mortgage insurance comes off with it. That's not a promise, because it depends on where rates are, and I'm not going to pretend I know that. What I can tell you is what this loan costs if nothing good ever happens.

And the alternative here isn't a cheaper loan. Conventional mortgage insurance is priced off your credit score and FHA's isn't, so at your score, with this little down, the conventional version charges more every month — and asks you to bring the down payment yourself. The real alternative to this loan isn't a better loan. It's waiting. So the question isn't 'FHA or something better.' It's 'FHA or not yet.'

Is ninety-seven dollars a month, permanently, worth owning this house this year?"

What fails. "Everyone refinances in a couple of years" — a promise about rates you cannot make. "It's basically the same as PMI" — false, and the borrower finds out in year eleven. And silence, which is the worst of the three, because the borrower learns it from a disclosure and concludes, reasonably, that you knew and did not say.

🎓 NMLS Exam Watch

The mortgage-insurance pairs candidates reverse. More exam points turn on this section than on any other material in this chapter, and the questions are built almost entirely out of swapped terms. Learn them as pairs.

The exam says	The trap	The answer
PMI vs. MIP	using them interchangeably	PMI is conventional. MIP is FHA. Different authority, different termination rules
Who does mortgage insurance protect?	"the borrower"	the lender. The borrower pays for it
80% vs. 78%	reversing them	80% = the borrower may request. 78% = automatic
Original value vs. current value	assuming HPA uses today's value	the HPA doors run on original value. Current-value cancellation is an investor rule, not the statute
Does the HPA govern FHA?	"yes"	No. The HPA governs borrower-paid PMI on conventional loans
The VA funding fee	calling it insurance	it is a fee, not insurance, and there is no monthly charge at all
USDA's annual fee	assuming it terminates	it runs for the life of the loan
FHA's 11-year rule	applying it to every FHA loan	it applies at 90% LTV or less, measured at origination
LPMI	expecting the rate to drop at 78%	no cancellation. The higher note rate is permanent
UFMIP vs. annual MIP	treating them as one charge	two separate premiums — one upfront and financed, one monthly

The single most productive sentence to memorize: the Homeowners Protection Act's 80% and 78% rules apply to borrower-paid private mortgage insurance on conventional loans, and to nothing else in this chapter.

One more thing about conventional MI

It comes in more than one flavor, and the choice is a real one Chapter 13 covers:

• Borrower-paid monthly (BPMI) — the default. Cancellable. What the Linden Street file uses.
• Single-premium — paid at closing or financed. No monthly charge, but not refundable in most structures and not cancellable, so an early payoff wastes it.
• Lender-paid (LPMI) — the lender pays the premium in exchange for a higher note rate. No monthly MI line, a permanently higher rate, and no cancellation — the rate does not drop at 78%.

LPMI is popular because the quoted payment looks clean and there is no MI line to explain. It is frequently the wrong choice for a borrower who will reach 78% and would have had the charge removed.

There is a fourth structure as well — split premium, a smaller upfront payment in exchange for a reduced monthly factor. It is less common, it is genuinely useful when someone else's money is paying the upfront portion, and it retains cancellability.

The four flavors are a real decision and the right answer moves with the borrower's horizon:

The trap in the single-premium and LPMI options is the same trap. Both convert a cancellable monthly charge into something permanent, in exchange for a better-looking payment today. Both are right for some borrowers. Neither should ever be chosen because it makes your quote look better against a competitor's, which is exactly the pressure that makes them popular.

Reading a mortgage insurance quote

The factor does not come from your rate sheet. It comes from a mortgage insurance company, and your loan origination system pulls a quote from one or more of them. Five things on that quote change the number, and a loan officer who knows all five can usually explain a surprise:

• Representative credit score. The dominant driver at the low end of the range.
• Loan-to-value. Higher LTV, higher factor.
• Coverage percentage — the share of the loan the insurer is on the hook for, set by the agencies in bands by loan-to-value. Higher coverage costs more, and reduced-coverage options exist on certain programs, which is precisely why the 3%-down programs mentioned in §5.2 can undercut a larger-down-payment loan. Verify the current coverage requirements against the Selling Guide.
• Loan term and product. A shorter term or a fixed rate generally prices better than a long term or an ARM.
• Occupancy and property type. Second homes and multi-unit properties price higher, if they are eligible at all.

Two more fields appear on the quote and confuse people. Refundable versus non-refundable applies to single-premium structures and changes the price meaningfully. And the renewal structure — whether the monthly premium is computed on the original balance for the life of the coverage or recalculates as the balance declines — determines whether the borrower's MI line is flat or drifts downward. Read which one you quoted before you promise a borrower their payment will fall.

MORTGAGE INSURANCE — the decision, in order
  Ask these in sequence. Each answer removes work from the next question.

  1. IS THE LTV ABOVE 80%?
       NO  -> no mortgage insurance on a conventional loan. Stop.
       YES -> continue.

  2. WHICH PROGRAM?
       VA        -> no monthly charge at all. A funding fee, possibly waived. Stop.
       USDA      -> annual fee, life of loan. Not optional, not structured. Stop.
       FHA       -> UFMIP + annual MIP. Go to 3.
       CONV      -> PMI. Go to 4.

  3. FHA: WHAT IS THE LTV AT ORIGINATION?
       <= 90%  -> annual MIP for 11 years.
       >  90%  -> annual MIP for the LIFE OF THE LOAN.
       Then ask: could the borrower reach 90.00% with cash they actually have?
       That question is worth 19 years of premium. Ask it.

  4. CONVENTIONAL: WHICH MI STRUCTURE?
       How long will this borrower hold this loan?
         Long / unknown  -> BPMI monthly. Cancellable. The safe default.
         Short, certain  -> consider LPMI (permanently higher rate, no cancellation)
         Someone else is paying upfront -> consider single-premium or split

  5. IN EVERY CASE, TELL THEM WHEN IT ENDS
       Conventional: the month it terminates, and that they may REQUEST at 80%
       FHA above 90% / USDA: that it does not end, in those words
       Then note the file, because you will be asked again in year three.

5.9 Occupancy, property type, and the eligibility grid

Two attributes of the transaction change eligibility and pricing as much as the borrower's credit does, and neither has anything to do with the borrower.

Occupancy

Government programs — FHA, VA, USDA — are primary residence programs. There are narrow exceptions in specific circumstances, and the general rule holds.

⚠️ Where Deals Die

Occupancy misrepresentation is fraud, and it is the most commonly attempted fraud in residential lending because it does not feel like fraud to the borrower.

A borrower buying a property for a child to live in, or as a rental, who states it is their primary residence to get better pricing and a lower down payment, has made a material misrepresentation on a federally related transaction. So has the loan officer who suggested it or looked away. Chapter 27 covers the red flags and the criminal exposure.

The practical version: when a borrower's story about occupancy does not fit the facts — a house two hours from their job, a "primary residence" purchase while they already own a home they are keeping — ask the question directly and document the answer. Most of the time there is an innocent explanation. When there is not, you want to have asked.

Property type

The condominium row is where new loan officers get hurt. A perfectly qualified borrower can be declined because of the building. Delinquent HOA dues across the project, insufficient reserves, too many rentals, or pending litigation can make a project ineligible, and none of it is anything the borrower can fix. Ask what kind of property it is on the first call, and if it is a condo, start the project review early.

The condominium project review, in the order it actually happens

"Start the project review early" is easy to write and easy to skip, so here is what it consists of and why the calendar punishes you for waiting.

A condominium unit is not a whole property. It is a share of a building plus a legal right to a box inside it, and the lender's collateral is therefore partly the association — its budget, its insurance, its maintenance, its lawsuits. An agency or government loan on a condo requires the project to be eligible. Lenders call an eligible project warrantable and an ineligible one non-warrantable, and a non-warrantable project is not a smaller problem than a declined borrower. It is a larger one, because there is no version of the borrower's file that fixes it.

The review is driven by a Condominium Project Questionnaire — Fannie Mae Form 1076, Freddie Mac Form 476 — completed by the homeowners association or its management company. Note who fills it out: a third party with no stake in your closing date, frequently a management company handling dozens of these requests, sometimes charging a fee and taking weeks. That is why the review starts on day one. It is the only condition in the file whose turn time you cannot influence by working harder.

What the review examines, in rough order of how often each one kills a file:

• Litigation. Pending or threatened litigation involving the association, particularly anything touching the structure, safety, or the common elements. Some categories are tolerated; construction defect and structural claims generally are not.
• Deferred maintenance and special assessments. Following the 2021 Surfside condominium collapse the agencies added requirements addressing projects with significant deferred maintenance, unsafe conditions, or large special assessments. The specifics have been revised more than once — check the current guidance rather than what you learned two years ago.
• Reserves. The association's budget must include an adequate line for replacement reserves — commonly stated as ten percent of the annual budget, with a reserve study sometimes substituting. Verify the current requirement.
• Delinquent assessments. A cap on the share of units behind on dues — commonly stated as no more than fifteen percent of units sixty days or more past due. Verify.
• Single-entity ownership. A cap on how many units one person or entity may own, because a single owner's default can destabilize the whole budget.
• Owner-occupancy ratio. Applies chiefly when the borrower is buying an investment unit in an established project; a primary-residence purchase is treated far more leniently.
• Commercial space. A cap on the share of the project's floor area used for non-residential purposes. Mixed-use buildings fail here regularly.
• Insurance. A master policy with adequate coverage, plus fidelity coverage and, where applicable, flood coverage on the building.
• Completion and phasing, on new construction — whether the project is finished and whether control has passed from the developer to the owners.

Two structural facts make this manageable rather than terrifying. A limited review exists for many primary-residence purchases at lower loan-to-value, and it is dramatically less burdensome than a full review — which is one more reason the down payment matters on a condo. And FHA maintains its own project approval list, plus a single-unit approval path for individual units in projects that are not approved as a whole. A condo that is unworkable on one program is sometimes routine on another, and knowing that is the difference between a declined file and a placed one.

📄 Read the File

text FIGURE 5.1 — "The borrower was never the problem" [constructed teaching example] THE DOCUMENT Condominium Project Questionnaire (Fannie Mae Form 1076 / Freddie Mac Form 476), completed and signed by the association's management company, returned on day 12 of a 30-day contract. THE CONTEXT A 96-unit established project. The borrower is buying a unit as a primary residence with 10% down. Credit 748, verified reserves of nine months, documented W-2 income, Approve/Eligible from the automated findings. On the borrower's side there is nothing to discuss. WHAT IT SHOWS Total units 96. Owner-occupied 61 (63.5%) - unremarkable for a primary residence purchase. One investor entity owns 14 units (14.6%). Units 60+ days delinquent on assessments: 11 (11.5%). Annual budget reserve line: 4% of the operating budget. Question 12, litigation: "Yes - claim filed against the developer concerning the building envelope; association is a named party." WHAT IT DOESN'T It does not say whether the envelope claim is cosmetic or structural, what it will cost, or whether a special assessment is coming. It does not include the reserve study. It does not say what the 11 delinquent units mean - a single hard year, or a project sliding. A questionnaire reports; it does not explain. THE DECISION Today: call the borrower and the agent and tell them the project is under review, before anyone else spends money. Request the reserve study, the last two years of minutes, and the litigation description in writing. Price the file on a program with an alternate path in case this one closes. Do NOT issue an unqualified pre-approval on this unit. THE LESSON On a condominium you are underwriting two applicants: the borrower and the building. Only one of them can be coached, and the other one does not return your calls.

⚠️ Where Deals Die

The perfect borrower the building declines.

There is a specific conversation that comes out of the figure above, and it is one of the hardest conversations in this job, because everything the borrower did was right.

They have an excellent score. They saved a real down payment. They gathered every document before you asked. They are the file you would take ten of. And the loan is dead because eleven strangers in their building are behind on dues, or because the association is a named party in a lawsuit about a wall.

What makes it worse is timing. Project review is the condition that comes back last. The borrower has by then paid for an appraisal, given notice on their apartment, and told everyone they know. And there is no remedy — you cannot document your way out of a project's balance sheet, and the borrower cannot fix a building they do not own yet.

What a disciplined loan officer does instead, all of it on day one:

1. Ask the property-type question on the first call, before the pre-approval letter. "Is it a condo, a townhome, or a detached house?" — and know that borrowers frequently answer "townhome" about a property that is legally a condominium. The legal form, not the shape of the building, is what governs.
2. Order the questionnaire immediately, and tell the borrower and the agent that it is ordered and who has to complete it. That last part matters: when it is late, everyone needs to know it is late at the management company and not at your desk.
3. Qualify the pre-approval letter in writing — approved subject to project eligibility review. It costs you nothing and it is the sentence that protects the borrower from committing before the answer exists.
4. Know your alternate path before you need it. FHA single-unit approval, a portfolio lender who holds condo loans, or a larger down payment moving the file into a limited review. Have the second option in mind on day one, not on day thirty.

The borrower will forgive a project that fails. They will not forgive finding out about it in week five.

The 2–4 unit file

A borrower buying a duplex, triplex, or fourplex and living in one unit is buying a primary residence. That surprises people, and it is the source of most of the program's value.

Four things change relative to a single-family purchase, and all four are worth knowing before you quote:

• The loan limits are higher, stepping up with unit count. A two-unit property has a higher conforming limit than a one-unit, and a four-unit higher still.
• Rental income from the other units may help the borrower qualify, subject to documentation and a vacancy factor. Chapter 11 works the calculation; the shape is that the underwriter counts less than the lease says.
• The appraisal is a different form. Small residential income properties are appraised on a form built for them, with a rent schedule attached, and they take longer.
• Government programs are available on owner-occupied 2–4 units, which is genuinely useful. FHA imposes an additional self-sufficiency test on three- and four-unit properties — the rental income must cover the payment by a defined measure. Verify the current test in HUD 4000.1 before you promise anything on a triplex.

The reason this matters for a chapter about program selection: a borrower who cannot qualify for the house they want can sometimes qualify for a duplex, because the tenant helps pay for it. That is a structuring idea, not a product, and it is exactly the kind of thing §5.10's Rule 1 is trying to protect.

Manufactured housing, and the one question that decides it

Manufactured housing is where new loan officers waste the most time, because the answer feels like it should be a lending question and it is actually a real estate question.

The question is: is this real property, or is it personal property?

A manufactured home financed as real property — permanently affixed to a permanent foundation, on land the borrower owns, with the home's separate title retired or purged under state law — is eligible for a range of programs, with restrictions and program-specific requirements. A manufactured home that remains personal property, typically because it sits on leased land in a community, is financed as chattel, which is a different market with different lenders and different pricing, and it is largely outside the map in §5.1.

Two more screens apply once you are in the real-property lane. The home must generally have been built after the federal construction standards took effect in June 1976 and carry its certification labels. And most programs treat manufactured housing as a distinct property type with its own eligibility rules and price adjustments — verify them for your specific program rather than assuming a single-family answer.

So the first-call script is three questions, not one: "Is the land owned or leased? Is the home on a permanent foundation? And has the title been retired?" Three answers and you know whether you have a mortgage file at all.

5.10 A decision tree that actually works

Six questions, in this order. The order matters — each one eliminates more than the next.

PROGRAM SELECTION — ask in this order

  1. MILITARY SERVICE?
     Veteran, active duty, qualifying Guard/Reserve, or surviving spouse?
       YES -> VA is almost certainly the answer. Price it FIRST.
               No down payment, no monthly MI, funding fee possibly waived.
       NO  -> continue
     (Ask this properly. Do not ask it once, casually, and move on.)

  2. LOAN AMOUNT vs. THE LOCAL CONFORMING LIMIT?
       OVER  -> jumbo or portfolio. Different world; check reserves early.
       UNDER -> continue
     (Thirty-second check. Prevents a category of disaster.)

  3. GEOGRAPHY AND HOUSEHOLD INCOME -> USDA eligible?
       Property in an eligible area AND household income under the limit?
       YES -> price USDA. Zero down, but the annual fee never ends.
       NO  -> continue

  4. CREDIT AND DOWN PAYMENT
       Score >= ~620 and 3-5% available?
         -> price CONVENTIONAL and FHA side by side. Do not guess.
       Score below conventional minimums, or significant derogatory history?
         -> FHA is likely the answer.
       Score 500-579?
         -> FHA at 10% down, if at all.

  5. OCCUPANCY AND PROPERTY TYPE
       Second home / investment?  -> conventional or non-QM only.
       Condominium?               -> start the project review NOW.
       Manufactured / unusual?    -> check program eligibility before quoting.

  6. DOCUMENTATION
       Can income be documented conventionally (W-2, returns, VOE)?
         YES -> stay in the categories above.
         NO  -> non-QM (Chapter 34), and have the honest cost conversation.

The two rules that make the tree work

Rule 1: never guess between conventional and FHA. Price both. §5.3 and §5.8 showed why — the comparison is genuinely non-obvious, it turns on MI duration rather than on the payment, and the answer changes with the borrower's credit score, down payment, and horizon. Running both takes a few minutes in a pricing engine.

Rule 2: the borrower decides, on your numbers. Your job is to produce an honest comparison and explain the trade-off. Presenting only the option you prefer — even when you are right — is how steering happens, and Chapter 26's anti-steering rules exist precisely because the incentive to do it is real.

📞 On the Phone

Borrower: "My agent said to avoid FHA. Is that right?"

What works: "Sometimes, and not for the reason they probably gave. FHA is a real program that exists for a real reason, and for a lot of borrowers it's the better answer. Here's the actual trade-off on your file: FHA needs about fifty-eight hundred less down and runs about eighteen dollars a month cheaper. But the mortgage insurance on FHA at your down payment lasts the whole thirty years, and on the conventional loan it comes off in about eleven — which over the full term is a difference of roughly thirty-eight thousand dollars.

So if the fifty-eight hundred is what makes this house possible, FHA is the right call and I'd tell you so. If you have the five percent, conventional is probably better. Which of those is your situation?"

Notice what that does: it refuses the premise without contradicting the agent, gives real numbers, names the actual trade-off, and hands the decision back.

🗂️ The Loan File

Chapter 5 contribution: the program shortlist.

Six questions from §5.10, answered on the Linden Street file.

The shortlist: conventional 95% and FHA 96.5%. Both priced, side by side:

What this settles: the field. Two real options, both viable, priced on the same facts. Everything else — jumbo, USDA, VA, non-QM, second home, condo review — is eliminated on grounds you can state in one sentence each.

What it does not settle: which one. That is Chapter 13, and it requires two things this chapter does not have: the borrowers' actual horizon (how long will they keep this loan?) and what they would do with the \$5,775 that FHA does not require them to put down.

Open questions carried forward:

• Q1. Can they afford this, or only qualify for it? (Chapter 8)
• Q2. Conventional or FHA — now a live question with numbers attached. (Chapter 13, with the full comparison built in Chapter 16)
• Q3. Will the appraisal support \$385,000? (Chapter 18)
• Q9. When can the mortgage insurance come off? Answered for the conventional option — payment 137. Answered for FHA — it does not. (Mechanics confirmed in Chapter 23)

Your task. In the Appendix C workbook, write one sentence for each eliminated program stating why it is out — the discipline being that "not eligible" is never an acceptable answer without a reason. Then answer the question Chapter 13 will need: what would you have to know about these borrowers to choose between conventional and FHA? List every fact, and mark which ones you already have.

Conclusion

Five categories, distinguished by who buys the loan: agency conforming, government, jumbo, portfolio, and non-QM. Pricing follows liquidity and rules follow the buyer, which is why agency loans price best and why a jumbo decline sometimes has no document behind it.

Conventional means not government-backed; conforming means it fits agency requirements, including a loan limit set annually by the FHFA. Check the loan amount against the local limit before you issue a pre-approval — it takes thirty seconds and prevents a category of disaster.

FHA insures rather than lends and serves borrowers conventional underwriting will not, at 3.5% down with more tolerant credit. VA guarantees loans to those who earned the benefit — no down payment, no monthly mortgage insurance, and a funding fee that some borrowers do not pay at all. Ask every borrower about military service properly, and never let folklore about VA offers talk an eligible borrower out of their entitlement. USDA is zero-down in eligible areas under a household income limit, with an annual fee that never ends.

Mortgage insurance is four different structures with four different names, and the terminology is tested: PMI is conventional and cancellable at 78% under the Homeowners Protection Act; MIP is FHA's and at high LTV lasts the life of the loan; the VA funding fee is not insurance and there is no monthly charge; USDA's annual fee never terminates. Never call MIP "PMI."

And on the Linden Street file, FHA is \$17.88 a month cheaper, needs \$5,775 less down, and costs \$38,155.54 more in mortgage insurance over the term. All three statements are true at once. Which one governs is a question about the borrower, not about the programs — which is the whole argument of this book.

Next: Chapter 6 walks the process end to end — application, processing, underwriting, closing — and maps the Linden Street file's fifty-one days onto it, so you can see where the calendar actually goes.

Key Terms

Conventional loan — a loan not insured or guaranteed by a government agency. (Ch.5)

Conforming loan — a conventional loan meeting Fannie Mae's or Freddie Mac's requirements for purchase, including a maximum loan amount. (Ch.5)

Conforming loan limit — the maximum loan amount the GSEs will purchase, set annually by the FHFA, with a baseline and higher high-cost area limits. (Ch.5)

High-balance loan — a conforming loan above the baseline limit but within a high-cost area limit; carries its own price adjustments. (Ch.5)

Jumbo loan — a loan exceeding the conforming limit for its area and unit count, sold to private investors or held on a balance sheet. (Ch.5)

Portfolio loan — a loan the originating lender retains rather than selling, underwritten entirely to the lender's own rules. (Ch.5)

Government loan — an FHA, VA, or USDA loan; insured or guaranteed by a federal agency and securitized through Ginnie Mae. (Ch.5)

FHA loan — a loan insured by the Federal Housing Administration, with a minimum down payment of 3.5% at qualifying scores and more tolerant credit standards. (Ch.5)

VA loan — a loan partially guaranteed by the Department of Veterans Affairs for eligible borrowers; no down payment and no monthly mortgage insurance. (Ch.5)

USDA loan — a loan guaranteed by USDA Rural Development for properties in eligible areas and households under an income limit. (Ch.5)

Non-QM loan — a loan outside the Qualified Mortgage definition, using alternative documentation; Ability-to-Repay still applies. (Ch.5)

Fixed-rate mortgage — a loan whose interest rate cannot change for the full term. (Ch.5)

Adjustable-rate mortgage (ARM) — a loan with an initial fixed period followed by periodic rate adjustments tied to an index. (Ch.5)

Index — the published market rate an ARM tracks; most current ARMs use a SOFR-based index. (Ch.5)

Margin — the fixed number of percentage points added to the index to set an ARM's rate; set at origination and never changed. (Ch.5)

Fully indexed rate — index plus margin; the rate an ARM would charge if it adjusted today, and the rate at which the borrower must be qualified. (Ch.5)

Caps — limits on an ARM's rate movement at the first adjustment, at each subsequent adjustment, and over the life of the loan. (Ch.5)

Mortgage insurance — coverage protecting the lender against loss, paid for by the borrower, that permits lending above 80% loan-to-value. (Ch.5)

PMI (private mortgage insurance) — conventional mortgage insurance; cancellable at 80% on request and terminating automatically at 78% of original value under the Homeowners Protection Act. (Ch.5)

MIP (mortgage insurance premium) — FHA's mortgage insurance, consisting of an upfront premium (UFMIP) and an annual premium whose duration depends on the loan-to-value at origination. (Ch.5)

LPMI (lender-paid mortgage insurance) — a structure in which the lender pays the premium in exchange for a permanently higher note rate; there is no monthly MI line and no cancellation. (Ch.5)

Funding fee — the VA's one-time, financeable charge in place of mortgage insurance; waived for certain borrowers including those receiving compensation for a service-connected disability. (Ch.5)

Guarantee fee / annual fee — USDA's upfront and ongoing charges; the annual fee continues for the life of the loan. (Ch.5)

Occupancy — whether a property will be a primary residence, second home, or investment property; a major driver of eligibility and pricing. (Ch.5)

Property type — the physical and legal category of the property (detached, condominium, PUD, 2–4 unit, manufactured), which affects eligibility independently of the borrower. (Ch.5)

Spaced Review

1. (Ch. 2) §5.7 says the Ability-to-Repay rule requires qualifying an ARM at the fully indexed rate. Name the specific 2000s product failure that rule was written in response to.

2. (Ch. 4) On the FHA option for this file, the base loan is \$371,525 and the total loan after financed UFMIP is \$378,026.69. Which figure is the LTV numerator, and what is the LTV?

3. A borrower is buying at \$860,000 with 5% down in an area where the limit is \$806,500. State the problem and list three fixes with their costs.

4. Explain to a borrower, in under sixty words, why their FHA mortgage insurance will not "come off at 78 percent" the way their neighbor's did.

5. A surviving spouse of a service member has never been told they may be eligible for a VA loan. Using §5.4 and §5.10, state whose job it was to ask, and what it would have been worth on the Linden Street file.