Lender requirements: conventional, FHA, VA, and USDA loans, LTV, and mortgage insurance

Match the loan to the borrower and property

Lenders evaluate income, debts, credit, assets, appraised value, and property condition. Program eligibility is not loan approval. Program details and lender requirements vary; use the assumptions supplied in an exam question.

Four loan categories

• Conventional: Not federally insured or guaranteed. Conforming loans meet applicable Fannie Mae or Freddie Mac purchase standards; jumbo loans can be conventional but nonconforming. Less than 20% down is possible, commonly with private mortgage insurance (PMI).
• FHA: The Federal Housing Administration insures qualifying approved-lender mortgages. Low down payments are possible, and mortgage insurance premiums apply. FHA generally insures rather than directly lending purchase funds.
• VA: The Department of Veterans Affairs generally guarantees part of a qualifying lender's loan for eligible veterans, service members, and certain surviving spouses. Eligibility, entitlement, and financial qualification matter. No down payment may be required when loan and value requirements permit. There is no monthly mortgage insurance, but a funding fee may apply unless exempt.
• USDA: The Department of Agriculture offers direct and guaranteed rural housing loans. Location and household income eligibility matter; the home need not be a working farm. No down payment may be available. Guaranteed loans can carry guarantee fees.

Loan to value

LTV = loan amount ÷ lender's value basis × 100. On a purchase, the basis is generally the lower of price and appraised value. A $200,000 loan divided by $250,000 equals 0.80, or 80% LTV. The remaining $50,000 is 20% buyer equity. Higher LTV leaves a smaller equity cushion.

Insurance distinctions

PMI protects the lender against covered default losses, although the borrower commonly pays. For covered conventional borrower-paid PMI, cancellation may generally be requested at 80% of original value subject to conditions; automatic termination generally occurs at the scheduled 78% point if current. FHA insurance follows different rules. Homeowners and flood insurance cover specified property damage rather than mortgage default.