Loan Types & Programs
~12 min read · Match conventional, FHA, VA and seller financing to borrower scenarios.
The RE exam's financing menu: conventional loans with PMI, FHA insurance for thin files, VA guarantees for veterans, plus the seller-financing toolbox — purchase-money mortgages, land contracts, and wraparounds. Know each structure's signature and its risk.
The institutional menu
Conventional: no government backing; under 20% down carries PMI (protects the lender; cancellable at 80% LTV by request, automatic at 78%). FHA-insured: low down payment (3.5% at qualifying scores), upfront + annual MIP, assumable with approval. VA-guaranteed: eligible veterans/service members, zero down, no monthly MI, a financeable funding fee (waived for disability-compensated veterans), backed by entitlement shown on the Certificate of Eligibility. USDA: rural, income-limited, zero down. Amortized loans self-liquidate; term/straight loans pay interest only with a principal balloon; ARMs float on index + margin within caps.
- Conventional + PMI under 20% down (80/78 cancellation)
- FHA: insured, low down, MIP both ways, assumable
- VA: guaranteed, zero down, funding fee, no monthly MI
- Amortized vs interest-only/term vs ARM structures
Seller financing
Purchase-money mortgage: the seller extends credit and takes back a mortgage from the buyer — often junior to an institutional first. Land contract / contract for deed / installment sale: buyer pays over time, takes possession and equitable title, but the seller keeps legal title until payoff — historically harsh on defaulting buyers. Wraparound mortgage: seller keeps paying the existing (assumable-context) first loan while the buyer pays the seller one larger 'wrap' payment covering it plus seller financing — dangerous under a due-on-sale clause. Every seller-financing structure prices around the buyer's bank problem: credit, down payment, or speed.
- Purchase-money: seller as lender, deed passes now
- Land contract: equitable title now, legal title at final payment
- Wraparound: one payment wraps the old loan plus seller credit
- Due-on-sale clauses menace wraps and informal takeovers
Junior financing and gap tools
Second mortgages and HELOCs ride junior priority at higher rates; piggyback structures (80-10-10) dodge PMI; bridge/swing loans span buy-before-sell gaps; construction loans disburse by draws then convert. Package loans include personalty (furnished condos), blanket loans cover multiple parcels with partial release clauses freeing lots as they sell — the developer's tool.
Worked example
A buyer with strong income but a 2-year-old credit blemish can't get bank approval. The seller owns the home free and clear and offers: $40,000 down, seller carries $360,000 at 7% for 10 years with a balloon — buyer gets the deed at closing. The buyer's cousin instead urges 'a contract for deed, it's the same thing.' Is it?
The seller's offer is a purchase-money mortgage: deed transfers at closing, buyer holds LEGAL title, seller holds a recorded mortgage and forecloses like any lender on default — buyer keeps equity protections and can refinance the balloon later. The cousin's 'same thing' is not: under a land contract, the seller retains legal title until the last payment; the buyer holds equitable title, and default can historically forfeit possession and payments with less process (modern statutes soften this, but protection varies). Same economics, profoundly different title positions and default outcomes. Free-and-clear ownership is what makes both possible — an existing loan would put a due-on-sale clause and a wraparound's risks into the picture.
Common exam pitfalls
Confusing FHA insurance with VA guaranty.
FHA insures (borrower pays MIP); VA guarantees a portion (funding fee, no monthly MI) — different machinery, different fees.
Treating a land contract like a sale with a mortgage.
Legal title stays with the seller until payoff — the buyer's position is equitable title, weaker on default.
Wrapping a loan with a due-on-sale clause.
The transfer can trigger acceleration of the underlying first — wraps live safely only where the first allows it.
Banks insure or guarantee; sellers carry, contract, or wrap — and title location tells you who's safe.
Recap
- Conventional/PMI, FHA/MIP, VA/funding fee, USDA — the institutional four
- PMI cancels at 80 (request) / 78 (automatic) of original value
- Purchase-money mortgage: deed now, seller holds a lien
- Land contract: equitable title now, legal title at final payment
- Wraparound: one payment covers old loan + seller credit; due-on-sale risk
- Blanket + partial release = the subdivider's financing
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