General Mortgage Knowledge — Government Loan Programs
mlopractice study guide with diagrams.
General Mortgage Knowledge — Government Loan Programs
Learning Objectives
By the end of this chapter, you should be able to:
4.Identify the purpose, eligibility requirements, and key features of FHA, VA, USDA, and Rural Housing Service loan programs.
5.Distinguish between the roles of HUD, FHA, VA, and USDA in the mortgage market.
6.Recall the specific mortgage insurance premium (MIP) rules, funding fee structures, and guarantee fee requirements for each government program.
7.Explain the occupancy, credit, and property requirements unique to each government loan product.
8.Recognize the statutory and regulatory citations that govern each program (e.g., National Housing Act, 38 U.S.C. for VA loans, 7 U.S.C. for USDA).
9.Apply the correct program rules to common borrower scenarios, including assumptions, refinances, and loan limits.
1.1 Overview of Government Loan Programs
Government loan programs are not originated by the government itself. Instead, they are insured, guaranteed, or funded by federal agencies but originated by approved private lenders. The three primary programs are:
FHA (Federal Housing Administration) — part of HUD, insures loans made by approved lenders against borrower default.
VA (Department of Veterans Affairs) — guarantees a portion of loans made to eligible veterans, active-duty service members, and certain reservists.
USDA (U.S. Department of Agriculture) — through its Rural Housing Service (RHS), provides loan guarantees and direct loans for low- and moderate-income borrowers in eligible rural areas.
The statutory basis for these programs is critical for the SAFE exam. The National Housing Act of 1934 created the FHA. The Servicemen’s Readjustment Act of 1944 (commonly known as the GI Bill) created the VA loan program. The USDA program operates under the Housing Act of 1949 and subsequent amendments, codified at 7 U.S.C. § 1922 et seq.
1.2 FHA Loan Program
1.2.1 Purpose and Structure
The FHA does not lend money. It insures private lenders against losses from borrower default. This insurance encourages lenders to offer loans with lower down payments and more flexible credit standards than conventional loans. FHA loans are governed by the National Housing Act, codified at 12 U.S.C. § 1701 et seq., and implemented through HUD regulations in 24 CFR Part 203.
1.2.2 Eligibility and Borrower Requirements
Occupancy: The borrower must occupy the property as a primary residence within 60 days of closing. FHA loans are not available for investment properties or second homes.
Credit: Minimum credit score is typically 500 with a 10% down payment; 580 or above qualifies for the 3.5% minimum down payment. Lenders may overlay stricter requirements.
Down Payment: Minimum 3.5% of the purchase price or appraised value, whichever is less. The down payment can come from gift funds, but the borrower must contribute at least 1.75% of their own funds unless the borrower is a first-time homebuyer or meets other exceptions.
Debt-to-Income (DTI) Ratio: Generally capped at 43% for most borrowers, though the FHA allows exceptions up to 50% with compensating factors (e.g., high credit score, substantial cash reserves).
1.2.3 Mortgage Insurance Premiums (MIP)
FHA loans require two types of mortgage insurance:
29.Upfront Mortgage Insurance Premium (UFMIP): Currently 1.75% of the base loan amount. This can be financed into the loan.
30.Annual Mortgage Insurance Premium (AMIP): Paid monthly, calculated as a percentage of the loan balance. The rate varies by loan term, loan amount, and loan-to-value (LTV) ratio. For most 30-year loans with LTV above 90%, the annual rate is 0.55% (for loans above $625,500, the rate is 0.70%). For loans with LTV at or below 90%, the rate is 0.50%.
Cancellation: For loans with a loan term greater than 15 years and an original LTV above 90%, MIP is required for the life of the loan. For loans with LTV at or below 90%, MIP is canceled after 11 years. For 15-year or shorter terms, cancellation rules differ: if LTV is above 90%, MIP lasts for the life of the loan; if LTV is 90% or less, MIP is canceled after 11 years.
1.2.4 Loan Limits
FHA loan limits are set by HUD and vary by county. The floor (minimum limit) is 65% of the national conforming loan limit (which is $766,550 for 2024, making the floor approximately $498,257). The ceiling (maximum limit) is 150% of the conforming limit in high-cost areas, approximately $1,149,825. High-balance areas include counties like Los Angeles, New York, and San Francisco.
1.2.5 Property Requirements
The property must meet Minimum Property Standards (MPS) under 24 CFR § 200.926. These standards address safety, soundness, and sanitation.
FHA loans are available for 1–4 unit properties, condominiums (must be on FHA-approved list), and manufactured homes (must meet HUD standards).
FHA 203(b) is the standard purchase loan. FHA 203(k) is a rehabilitation loan that allows financing of repairs. FHA Streamline Refinance allows refinancing of an existing FHA loan with limited documentation and no appraisal, provided the borrower is not more than 30 days late on the current loan and the refinance results in a net tangible benefit.
1.2.6 Assumption
FHA loans are generally assumable, subject to lender approval. The borrower must meet credit and occupancy requirements. If the loan was originated on or after December 15, 1989, the assuming borrower must be credit-qualified. For loans originated before that date, assumption may be without credit approval.
1.3 VA Loan Program
1.3.1 Purpose and Structure
The VA loan program guarantees a portion of loans made to eligible veterans, active-duty service members, National Guard and Reserve members, and certain surviving spouses. The program is codified at 38 U.S.C. § 3701 et seq., with regulations in 38 CFR Part 36. The VA does not make loans; it guarantees the lender against loss.
1.3.2 Eligibility and Certificate of Eligibility (COE)
Eligibility is based on service history. Generally, a veteran must have served 90 consecutive days of active duty during wartime, or 181 days during peacetime, or 6 years in the National Guard or Reserves. Dishonorable discharges disqualify a borrower. Surviving spouses of service members who died in the line of duty or as a result of a service-connected disability may also be eligible.
The borrower must obtain a Certificate of Eligibility (COE) from the VA. This can be obtained online through the eBenefits portal, by mail, or through the lender using the VA’s automated system.
1.3.3 Down Payment and Funding Fee
No down payment is required for most borrowers, provided the loan amount does not exceed the VA’s reasonable value determination.
VA Funding Fee: This is a one-time fee paid to the VA to offset the cost of the program. The fee varies by:
Loan type (purchase, cash-out refinance, interest rate reduction refinance loan)
Down payment percentage
Whether the borrower has used the benefit before
For a first-time purchase with zero down payment, the funding fee is 2.15% of the loan amount. For subsequent uses, it is 3.3%. The fee is reduced with down payments: 1.5% for 5% down, 1.25% for 10% down (first use). The funding fee can be financed into the loan. Borrowers receiving VA disability compensation are exempt from the funding fee.
1.3.4 Loan Limits and Entitlement
The VA does not impose a maximum loan amount, but it does limit the amount of the guarantee. The basic entitlement is $36,000. Under the Veterans Benefits Improvement Act, for loans above $144,000, the VA provides an additional entitlement up to 25% of the Freddie Mac conforming loan limit (which is $766,550 for 2024). Therefore, the maximum guarantee is 25% of the conforming limit, or $191,637.50. Lenders may require a down payment for loans that exceed the county loan limit, but the VA itself does not cap the loan amount.
1.3.5 Occupancy and Credit
Occupancy: The borrower must occupy the property as a primary residence. There is a 60-day occupancy requirement after closing, with exceptions for military service or extended duty.
Credit: The VA does not set a minimum credit score, but lenders typically require at least 620. The VA requires that the borrower have satisfactory credit, sufficient income, and a residual income analysis (a calculation of income left after paying major expenses) to ensure the borrower can meet obligations.
1.3.6 Property Requirements
The property must meet the VA Minimum Property Requirements (MPRs) under 38 CFR § 36.4340. These include safety, structural integrity, and sanitary conditions. The VA requires a termite inspection in certain states and a well and septic inspection if applicable.
1.3.7 Refinance Options
Interest Rate Reduction Refinance Loan (IRRRL), also called a VA Streamline Refinance: Requires that the borrower already has a VA loan, that the new loan reduces the interest rate (or the payment), and that the borrower certify occupancy. No appraisal is required.
Cash-Out Refinance: Allows the borrower to take equity out of the home. The loan amount can be up to 100% of the appraised value. The funding fee is higher for cash-out refinances (2.15% for first use, 3.3% for subsequent use).
1.3.8 Assumption
VA loans are assumable, but the assuming borrower must be credit-qualified and pay a funding fee (0.5% for assumption). The VA must approve the assumption.
1.4 USDA Rural Development Loan Program
1.4.1 Purpose and Structure
The USDA Rural Development (RD) program, specifically the Single Family Housing Guaranteed Loan Program (Section 502), provides 100% financing to low- and moderate-income households in eligible rural areas. The program is authorized under the Housing Act of 1949, codified at 7 U.S.C. § 1922, and implemented through 7 CFR Part 3555.
1.4.2 Eligibility Requirements
Income Limits: The borrower’s household income cannot exceed 115% of the area median income (AMI) for the guaranteed program. For the direct loan program, income must be below 50–80% of AMI, depending on family size.
Geographic Eligibility: The property must be located in an eligible rural area. HUD defines rural as areas with a population of 35,000 or less and not part of a metropolitan statistical area (MSA) with a population over 35,000. The USDA maintains an online eligibility map.
Occupancy: The borrower must occupy the property as a primary residence. No investment properties or second homes are allowed.
Credit: Minimum credit score is typically 640 for automated underwriting; manual underwriting may allow lower scores. The borrower must have a history of satisfactory credit and demonstrate the ability to repay.
Down Payment: No down payment is required. The loan is 100% financing.
1.4.3 Guarantee Fee and Annual Fee
Upfront Guarantee Fee: Currently 1.0% of the loan amount. This can be financed into the loan.
Annual Fee: 0.35% of the average outstanding principal balance, paid monthly. This is similar to FHA MIP but is called a guarantee fee.
1.4.4 Property Requirements
The property must be a modest, single-family dwelling (including townhouses, condos, and manufactured homes) that meets the USDA’s Minimum Property Requirements. The home must be structurally sound, safe, and sanitary. The land must be residential and not used for income-producing purposes.
1.4.5 Loan Limits
USDA loan limits vary by county and are set at 100% of the FHA loan limit for that county, but not to exceed a national cap. For 2024, the maximum loan limit is $1,149,825 in high-cost areas, but most rural areas have lower limits.
1.4.6 Refinance Options
The USDA offers a Streamline Refinance for existing USDA borrowers, which requires no appraisal and limited documentation, provided the new loan results in a lower payment. There is also a Non-Streamline Refinance that allows cash-out up to 100% of the appraised value, subject to income and occupancy requirements.
1.5 Comparison of Key Features
Feature
FHA
VA
USDA
Down Payment
3.5% minimum
0%
0%
Mortgage Insurance
UFMIP 1.75% + annual MIP
Funding fee (varies)
Guarantee fee 1.0% + annual 0.35%
Occupancy
Primary residence
Primary residence
Primary residence
Credit Score (typical)
580+
620+ (lender)
640+
Loan Limits
County-based
No cap (guarantee cap)
County-based
Assumable
Yes
Yes
Yes (with approval)
1.6 Cross-Cutting Rules and Disclosures
All government loans are subject to the same federal disclosure requirements as conventional loans, including:
TILA-RESPA Integrated Disclosure (TRID): The Loan Estimate must be provided within 3 business days of application, and the Closing Disclosure at least 3 business days before closing. Government loans are not exempt.
ECOA/Regulation B (12 CFR 1002): Prohibits discrimination based on race, color, religion, national origin, sex, marital status, age, or receipt of public assistance.
Fair Housing Act: Prohibits discrimination in housing transactions.
HMDA/Regulation C: Requires reporting of loan data, including government loans.
SAFE Act (12 U.S.C. § 5101): Requires MLOs to be licensed and registered.
1.7 Common Exam Traps
100.Confusing FHA MIP with VA Funding Fee: Candidates often mix up the names. FHA charges MIP (upfront and annual). VA charges a funding fee (not MIP). USDA charges a guarantee fee. The exam will test your ability to match the correct fee to the correct program.
101.MIP Cancellation Rules: Many candidates incorrectly assume FHA MIP is canceled at 20% equity like conventional PMI. For FHA loans with LTV above 90% and a term over 15 years, MIP is for the life of the loan. Only loans with LTV ≤ 90% have MIP canceled after 11 years.
102.VA Funding Fee Exemption: Candidates often forget that veterans receiving VA disability compensation are exempt from the funding fee. This is a frequently tested exception.
103.Occupancy Timing: The FHA requires occupancy within 60 days of closing. The VA also has a 60-day requirement. Candidates often confuse this with the 3-day rescission period under TRID. The 60-day occupancy is a program rule, not a federal disclosure deadline.
104.USDA Income Limit: Candidates sometimes think USDA loans have no income limit. In fact, the limit is 115% of AMI. The exam may present a scenario where a borrower earns too much to qualify.
105.Loan Limits vs. Entitlement: For VA loans, candidates often confuse the loan limit with the entitlement. The VA does not limit the loan amount; it limits the guarantee. A borrower can get a VA loan above the county limit, but the lender may require a down payment for the portion exceeding the guarantee.
106.Assumption Rules: FHA loans originated after December 15, 1989, require credit qualification for assumption. VA loans always require credit qualification. Candidates often forget the date cutoff for FHA.
107.Streamline Refinance Documentation: FHA Streamline does not require an appraisal, but it does require a net tangible benefit. VA IRRRL requires a reduction in interest rate or payment. USDA Streamline requires a lower payment. Candidates often mix these requirements.
1.8 Key Statutory References for the Exam
FHA: National Housing Act, 12 U.S.C. § 1701; HUD regulations at 24 CFR Part 203.
VA: 38 U.S.C. § 3701; VA regulations at 38 CFR Part 36.
USDA: Housing Act of 1949, 7 U.S.C. § 1922; USDA regulations at 7 CFR Part 3555.
SAFE Act: 12 U.S.C. § 5101 et seq.
RESPA: 12 U.S.C. § 2601 et seq.
TILA: 15 U.S.C. § 1601 et seq.; Regulation Z at 12 CFR Part 1026.
