Chapter 5 — Key Takeaways

The five categories — organized by who buys the loan

Category Buyer Rules
Agency conforming Fannie Mae / Freddie Mac the Selling Guides — public and free
Government (FHA, VA, USDA) securitized via Ginnie Mae HUD 4000.1, VA handbook, USDA handbook
Jumbo private-label investors, or a bank the investor's — not public
Portfolio nobody; the lender keeps it the lender's own
Non-QM specialized investors the investor's; ATR still applies

Pricing follows liquidity. Rules follow the buyer.

The terminology that gets tested

  • Conventional = not government-backed. It says nothing about loan size or down payment. A \$1.4M loan is conventional; a 3%-down Fannie loan is conventional; an FHA loan is not.
  • Conforming = meets agency requirements including the loan limit.
  • Government loan = FHA, VA, or USDA. Fannie and Freddie loans are not government loans.
  • Never call FHA's MIP "PMI."

The four mortgage insurance structures

Program Name Upfront Monthly Terminates?
Conventional PMI usually none above 80% LTV YES — 80% request / 78% automatic (HPA), on original value
FHA MIP UFMIP ~1.75%, financed annual MIP LTV ≤ 90% → 11 years · LTV > 90% → LIFE OF LOAN
VA funding fee (not insurance) yes, financeable, exemptions apply NONE n/a
USDA guarantee fee + annual fee yes, financeable annual fee NO — life of loan

The FHA duration category is set at origination and never revisited. A 3.5%-down borrower can never reach the 11-year band, no matter how much they pay down.

The comparison that is the chapter

On the Linden Street file:

Conventional 95% FHA 96.5%
Cash down \$19,250.00 | **\$13,475.00**
PITI \$3,033.72 | **\$3,015.84**
MI terminates payment 137 never
Total MI over the term \$24,218.86** | **\$62,374.40

FHA is \$17.88/month cheaper, needs \$5,775 less down, and costs \$38,155.54 more in mortgage insurance. All three are true. Which governs is a fact about the borrower.

ARMs, in four words

Index (moves) · margin (never changes) · fully indexed rate = index + margin · caps (first / subsequent / lifetime).

The borrower is qualified at the higher of the fully indexed rate or the initial rate — so the ARM's low initial payment does not help them qualify. That rule is the direct answer to the 2/28 teaser-rate failure.

On the illustration: initial 5.875% → \$2,163.55 · qualifying 7.00% → \$2,433.34 · lifetime cap 10.875% → \$3,448.62**. Worst case is **\$1,285.07/month above the initial payment. Show the worst case first.

The decision tree

  1. Military service? → VA. Ask out loud, including Guard, Reserve, and surviving spouses.
  2. Loan amount vs. the local limit? → over means jumbo. Thirty-second check.
  3. Geography + household income → USDA eligible?
  4. Credit and down payment → price conventional AND FHA. Never guess.
  5. Occupancy and property type → condo means start the project review now.
  6. Documentation → can income be documented conventionally?

The rules of thumb

  • Check the loan amount against the local conforming limit before issuing a pre-approval letter.
  • Ask about military service out loud, every time, in words that include Guard, Reserve, and spouses.
  • Never guess between conventional and FHA. Price both; the answer turns on MI duration.
  • Quote total MI cost, not the monthly amount. \$24,218.86 vs. \$62,374.40 lands instantly.
  • Worst case first on any product with a payment that changes.
  • Ask what kind of property it is on the first call. Condos can decline a perfect borrower.
  • Verify every number in this chapter at the source. All of them are revised on a schedule.

Key terms

conventional · conforming · conforming loan limit · high-balance · jumbo · portfolio · government loan · FHA · VA · USDA · non-QM · fixed-rate · ARM · index · margin · fully indexed rate · caps · mortgage insurance · PMI · MIP · UFMIP · LPMI · funding fee · guarantee fee · annual fee · occupancy · property type

Monday morning

You should be able to:

  • Place any loan on the five-category map and say who buys it
  • Run the six-question decision tree on a live caller in three minutes
  • Explain the four MI structures without confusing MIP and PMI
  • Tell an FHA borrower accurately when their MIP ends — including that it may not
  • Explain an ARM's worst case before quoting its best case
  • Correct the "sellers reject VA offers" claim without contradicting the agent who said it
  • Say, for every program you eliminated, one sentence of why

The one sentence

There is no best loan — only the best loan for the borrower in front of you, and the difference is usually a feature that does not appear in the quote.