Types of Mortgages and Loans for the Texas Exam

Financing is one of the eight national content areas, and loan types are the foundation of it. This pillar sits at the center of the financing and settlement area and links to the deeper spokes. Almost every buyer you work with uses one of these loans, so the exam expects you to sort them fast.

The useful pattern is to ask who backs the loan, who qualifies, what investment may be required, and what insurance or fee structure applies.

What are the main types of mortgage loans?

Mortgage loans fall into two broad families. Conventional loans are not backed by the government and are made by private lenders. Government loans are insured or guaranteed by a federal agency: FHA loans through the Federal Housing Administration, VA loans through the Department of Veterans Affairs, and USDA loans through the Department of Agriculture. Within each family, a loan is also either fixed-rate or adjustable-rate.

Start with the big split. A conventional loan is any loan not backed by a government program. The lender takes the risk, so the borrower usually needs stronger credit and a larger down payment. A government loan is backed by a federal agency that insures or guarantees the lender against loss, which lets lenders offer easier terms.

Keep the verbs straight, because the exam likes them. The FHA insures loans, the VA and USDA guarantee loans, and neither one lends the money directly. Private lenders make the loans, and the agency stands behind them.

Conventional loans: conforming, nonconforming, and jumbo

A conventional loan is not government-backed. It is conforming if it meets the applicable loan limit and other purchase standards, while a loan above the applicable conforming limit is commonly called jumbo. For 2026, the baseline conforming limit for a one-unit home is $832,750. Conventional PMI is commonly required at an original LTV above 80 percent.

Conventional does not automatically mean conforming. A conforming loan meets the applicable limit and other purchase standards for acquisition by Fannie Mae or Freddie Mac. A nonconforming conventional loan misses one or more of those standards; a loan above the applicable limit is the common jumbo subtype. For 2026, the baseline conforming limit on a one-unit property is $832,750, with a $1,249,125 ceiling in designated high-cost areas.

The insurance rule is highly testable. PMI protects the lender, not the borrower. On a covered loan, the borrower may request cancellation at the scheduled 80 percent point if federal conditions are met. Automatic termination generally occurs at the scheduled 78 percent point if the borrower is current. This ties directly to the loan-to-value ratio and down payment math.

FHA loans: the low-down-payment option

An FHA loan is insured by the Federal Housing Administration and is open to any qualified borrower, not just first-time buyers. It allows a down payment as low as 3.5 percent with a qualifying credit score. In exchange, the borrower pays a mortgage insurance premium, or MIP, which includes an upfront premium and an annual premium. FHA is the go-to program for buyers with smaller down payments or weaker credit.

FHA is the workhorse for buyers who cannot put much down. The Federal Housing Administration insures the loan, so lenders accept a down payment as low as 3.5 percent for borrowers who meet the credit threshold. There is no military or rural requirement, and it is not limited to first-time buyers, though first-timers use it heavily.

FHA uses mortgage insurance premium, or MIP, with upfront and annual components. Unlike conventional PMI, the current MIP duration depends on original LTV and mortgage term. For many 30-year loans above 90 percent original LTV, annual MIP continues for the mortgage term.

VA loans: zero down for eligible borrowers

A VA loan is guaranteed by the Department of Veterans Affairs for eligible veterans, active-duty service members, and some surviving spouses. Its headline feature is no down payment when the borrower and transaction qualify and the price does not exceed appraised value, plus no monthly mortgage insurance. The borrower usually pays a one-time VA funding fee, which can be financed into the loan. Some borrowers are exempt from that fee under current VA rules.

The VA loan is the strongest benefit in the set, but only for those who earned it. The Department of Veterans Affairs guarantees the loan for eligible veterans, active-duty members, and certain surviving spouses. The two features to remember are zero down payment and no monthly mortgage insurance, which sets it apart from FHA.

In place of ongoing insurance, a non-exempt borrower pays a one-time VA funding fee, a percentage of the loan that can be rolled into the amount financed. Current exemptions include qualifying borrowers receiving or eligible to receive VA disability compensation, certain surviving spouses receiving Dependency and Indemnity Compensation, and an active-duty service member with evidence of a Purple Heart. The VA, not a lender blog, controls eligibility and exemption status.

USDA loans: zero down in rural areas

A USDA guaranteed loan supports eligible low- and moderate-income households buying a primary residence in an eligible rural area. It can provide 100 percent financing through approved lenders, subject to current income, property, occupancy, and underwriting rules. Instead of conventional PMI, the program uses guarantee fees.

The USDA program focuses on eligible rural areas and qualifying households. Current agency eligibility tools and income limits control, so do not treat one percentage as a universal approval rule. The stable exam cues are eligible rural property, primary residence, income eligibility, approved lender, and potential 100 percent financing.

USDA's guaranteed program can offer 100 percent financing and uses an upfront guarantee fee and an annual fee. For the exam, pair USDA with eligible rural property, primary occupancy, household income limits, and current program underwriting.

Fixed-rate versus adjustable-rate loans

Mortgage interest can be fixed or adjustable. A fixed-rate loan keeps the same interest rate for the term, so the scheduled principal-and-interest payment remains stable. An adjustable-rate mortgage, or ARM, can change after its initial period based on an index plus a margin, subject to its caps.

This split cuts across every loan type. A fixed-rate loan locks the interest rate for the entire term, so the principal-and-interest payment stays constant and predictable. It is the safe, simple choice, and the one most buyers pick.

An adjustable-rate mortgage trades early savings for later uncertainty. It opens with a lower starting rate, sometimes called a teaser rate, for an initial period. After that, the rate adjusts on a schedule using two pieces: the index, a market rate that moves over time, plus the margin, a fixed markup the lender sets. Index plus margin equals the new rate. To protect the borrower, ARMs include caps that limit how far the rate can jump at each adjustment and over the life of the loan. On the exam, remember index plus margin, the teaser start, and the caps.

Seller financing and land contracts

Pearson includes seller financing in the official financing-methods row. In seller financing, the seller extends some or all of the credit instead of receiving the entire price from a third-party lender at closing. The buyer may give the seller a note secured by a mortgage or deed of trust.

A land contract, also called a contract for deed, is different. The buyer typically takes possession and pays in installments while the seller retains legal title until the contract requirements are satisfied. State law controls the form, disclosures, remedies, and consumer protections. The exam clue is retained legal title, not simply that the seller receives payments.

How loan types connect to a Texas deal

Loan programs are federal, so they work the same in Texas as elsewhere, but they plug into Texas contract and title steps. The TREC contract uses the Third Party Financing Addendum to state the loan type and make the deal contingent on financing. The loan itself is secured by a Texas deed of trust, and Texas homestead and home-equity rules add their own limits on lending against a primary residence.

The loan types are national, but they land inside a Texas transaction. When a buyer uses financing, the TREC contract adds the Third Party Financing Addendum, which names the loan type and makes closing contingent on the buyer getting approved. See how it fits the one-to-four family residential contract.

Once approved, the loan is secured not by a mortgage document in the classic sense but by a Texas deed of trust, covered in the deed of trust and non-judicial foreclosure spoke. Texas also protects the homestead and limits home-equity borrowing under its constitution, which shapes what lenders can do against a primary residence. For this pillar, just connect the dots: federal loan, Texas addendum, Texas deed of trust.

How to study loan types for the exam

Study loan types with a three-question grid for each program: who backs it, what down payment it needs, and what insurance it carries. Learn conventional versus the three government programs, then conforming versus jumbo, then fixed versus adjustable. Anchor the numbers you can, like 3.5 percent for FHA and zero down for VA and USDA, and keep PMI tied to conventional and MIP tied to FHA.

Do not drown in fees. Build a mental grid and fill it in for each loan. Who backs it, the minimum down payment, and the mortgage insurance are the three columns that answer most questions. Then layer the fixed-versus-adjustable choice on top, since it applies to any program.

Keep this pillar connected to its spokes. The note, mortgage, and deed of trust spoke covers the paperwork that secures the loan, mortgage insurance goes deeper on PMI, MIP, and the VA fee, and the loan-to-value and down payment guide drills the math.

Frequently asked questions

Is an FHA loan only for first-time home buyers? No. FHA loans are open to any qualified borrower, not just first-time buyers, though first-timers use them often because of the low 3.5 percent down payment. There is no military or rural requirement. The borrower simply meets FHA credit and income standards and pays the mortgage insurance premium.

What is the difference between PMI and MIP? PMI is private insurance commonly used with conventional loans. A covered borrower may request cancellation at the scheduled 80 percent point if federal conditions are met, and automatic termination generally occurs at the scheduled 78 percent point if the borrower is current. FHA MIP has upfront and annual components and a different duration schedule tied to original LTV and mortgage term.

What makes a loan jumbo instead of conforming? A conforming loan meets the applicable limit and other purchase standards. The 2026 baseline one-unit limit is $832,750, with higher limits in designated high-cost areas. A loan above the applicable conforming limit is commonly called jumbo and follows private investor requirements.

How does an adjustable-rate mortgage set its rate? After the initial fixed period, an ARM sets its rate by adding two numbers: the index, a market interest rate that moves over time, and the margin, a fixed amount the lender sets at origination. Index plus margin is the new rate, subject to caps that limit how much it can rise at each adjustment and over the life of the loan.

Practice questions

1. A buyer with no military service and a 12 percent down payment wants the lowest ongoing cost and plans to cancel mortgage insurance once they build equity. Which loan best fits? A. A VA loan B. A USDA loan C. A conventional loan with PMI D. An FHA loan with MIP

Answer: C. A covered conventional loan can allow a qualifying borrower to request PMI cancellation at the scheduled 80 percent point. VA requires eligibility, USDA requires an eligible rural property and household, and FHA uses a different MIP duration schedule.

2. Which statement about VA loans is correct? A. They require at least 3.5 percent down B. They allow no down payment and charge no monthly mortgage insurance C. They are available to any buyer in a rural area D. They are insured by the Federal Housing Administration

Answer: B. The VA loan's signature features are zero down payment for a qualifying transaction and no monthly mortgage insurance. Most borrowers pay a one-time funding fee, but current VA exemptions apply to some borrowers. The 3.5 percent figure is FHA (A), rural eligibility describes USDA (C), and the VA guarantees rather than the FHA insuring (D).

3. A loan on a one-unit home for $1,050,000 in a standard-cost Texas county in 2026 exceeds the baseline conforming limit. This loan is best described as: A. An FHA loan B. A conforming loan C. A jumbo loan D. A USDA loan

Answer: C. A conventional loan above the applicable 2026 conforming limit is a jumbo loan and is not eligible for purchase as a conforming loan by Fannie Mae or Freddie Mac. It is not government-backed (A and D), and it is not conforming because it exceeds the limit (B).

4. On an adjustable-rate mortgage, the new interest rate after the initial period is determined by: A. The margin alone, set by the lender B. The index alone, set by the market C. The index plus the margin, subject to caps D. A simple average of fixed rates that year

Answer: C. An ARM's adjusted rate equals the index, a moving market rate, plus the margin, the lender's fixed markup, limited by rate caps. Neither piece works alone (A and B), and it is not an average of market rates (D).

Sources and methodology

This guide was written from primary federal and Texas sources and reverified on August 12, 2026. Loan limits and fees are current-year figures and change annually, so confirm them before quoting a number to a client.

• The two loan families, the insure-versus-guarantee distinction, and the agency roles come from the Federal Housing Administration (HUD), the Department of Veterans Affairs, and the Department of Agriculture loan program guidance.
• The 2026 baseline conforming loan limit of $832,750 comes from the Federal Housing Finance Agency (FHFA).
• The FHA 3.5 percent down payment and MIP structure come from HUD FHA guidance. The VA zero-down and funding fee come from VA loan guidance. The USDA zero-down, rural area, and 115 percent income limit come from USDA Rural Development.
• The conventional PMI rule, removable at 80 percent and auto-terminated at 78 percent, comes from the federal Homeowners Protection Act. The ARM index, margin, and caps come from the Consumer Financial Protection Bureau.

Verify all loan limits, fees, and program rules against the current agency sources before you rely on them in practice.

Official source links

• FHFA, Conforming Loan Limit Values
• FHFA, 2026 Conforming Loan Limits
• HUD, FHA Handbook 4000.1
• VA, Home Loans
• VA, Funding Fee and Closing Costs
• USDA, Single Family Housing Guaranteed Loan Program
• CFPB, When You Can Remove PMI
• CFPB, Adjustable-Rate Mortgages

This article is exam-prep education for the Texas real estate sales agent license. It is not lending, financial, or legal advice, and it does not create an agency relationship. Loan programs, conforming limits, and fees change every year and depend on the borrower and property. Always confirm the current FHFA, HUD, VA, USDA, and CFPB sources and work under the supervision of your sponsoring broker before acting.