[NMLS SAFE] 15, FHA, VA and USDA Loans Explained

Lesson 15 of the free Quibank NMLS SAFE course, and the start of a new block: general mortgage knowledge. Today, the three government loan programs — FHA, VA, and USDA. One idea sits under all three: who absorbs the loss if the borrower stops paying, and what did they charge for taking that risk? General mortgage knowledge is 20% of the SAFE exam — about 23 of the 115 scored questions, the third-largest block behind origination activities and federal law.

Government programs come up here constantly, and the rules are structural rather than numerical, so they stay learned. The mechanism. Insured means a government fund stands behind the loan and the borrower pays premiums into that fund. Guaranteed means the government promises to cover the lender's loss on a portion of the loan, and the borrower pays a fee for that promise.

Insurance is a policy you keep paying for; a guaranty is a co-signer with a limit, who signs once and never sends another bill. That is why an FHA borrower pays mortgage insurance every month and a VA borrower does not. Exam version. Which statement correctly describes how the government programs protect the lender?

The answer: FHA insures the loan, with premiums the borrower pays into an FHA insurance fund, while VA guarantees the lender against loss on a portion of the loan. Every wrong option moves one of those words — monthly premiums onto VA, HUD insurance onto USDA, or the guaranty onto FHA. The rule: FHA insures; VA and USDA guarantee. USDA Section 502 Guaranteed has the most distinctive eligibility in the federal lineup — two screens no other major program uses together.

The property must sit in an area USDA has designated as eligible, which in practice means rural. And adjusted annual household income must be at or below the applicable area income limit, counting adult household members who are not on the loan at all. Notice what is not on that list: the program is owner-occupied only, but there is no down payment requirement and no first-time buyer requirement. Exam version.

Which pair of requirements is characteristic of Section 502 Guaranteed? Eligible rural area, plus household income within the area limit. The distractors bolt on a minimum down payment, or first-time buyer status, or a second home anywhere in the country. The rule: place, plus the whole household.

Back to VA, and the word that trips people up: entitlement. Because VA guarantees only a portion, each eligible veteran carries a finite amount of guaranty, and while it is tied to one property it is not available for the next one. So when a veteran sells, the question is not only whether she is off the note — it is whether she got her entitlement back. A VA loan is assumable with lender and VA approval, and two documents do two different jobs.

A release of liability protects the seller from liability on the debt. Substitution of entitlement moves the guaranty onto the buyer's entitlement, and only an eligible veteran buyer can do that. Take the release without the substitution and your entitlement stays tied to a house you no longer own. Exam version.

A veteran sells to a buyer assuming her VA loan with lender and VA approval. What frees her entitlement for a future home? The buyer must be an eligible veteran who substitutes his or her own entitlement, in addition to the release of liability. The trap answer is the release by itself; the others invent an automatic 12-month restoration, or claim only a spouse may assume.

Lock these in. FHA insures, paid for by an up-front and an annual premium into the FHA insurance fund. VA guarantees a portion, paid for by a one-time funding fee — hence no monthly mortgage insurance. USDA Section 502 Guaranteed is guaranteed by USDA Rural Development, and screens both the property's location and the whole household's income.

And a release of liability is not a substitution of entitlement. Next lesson: conventional loans — conforming, jumbo, private mortgage insurance, and who buys your loan in the secondary market. Practice every one of these free at quibank.com/en/mlo. See you in lesson 16.