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 trick is not memorizing every number. It is learning the pattern: for each loan, ask who backs it, what down payment it needs, and what insurance it carries. Get that framework, and the details fall into place. Let us build it.

What are the main types of mortgage loans?

Snippet answer: 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 versus jumbo

Snippet answer: A conventional loan is not government-backed. It is conforming if it meets the loan limits and standards set by Fannie Mae and Freddie Mac, and jumbo if it exceeds the conforming loan limit. For 2026, the baseline conforming limit for a one-unit home is $832,750. Conventional loans require private mortgage insurance, or PMI, when the down payment is under 20 percent.

Conventional loans divide again by size. A conforming loan meets the limits and underwriting standards set by Fannie Mae and Freddie Mac, which lets those agencies buy it on the secondary market. For 2026, the baseline conforming limit on a one-unit property is $832,750, with higher ceilings in designated high-cost areas. A loan above the limit is a jumbo loan, which stays with private investors and usually demands stronger credit and a larger down payment.

The insurance rule is the tested part. When a conventional borrower puts down less than 20 percent, meaning the loan is more than 80 percent of value, the lender requires private mortgage insurance. PMI protects the lender, not the borrower. It can be removed once the loan reaches 80 percent of the original value, and by federal law the lender must cancel it automatically at 78 percent. This ties directly to the loan-to-value ratio and down payment math.

FHA loans: the low-down-payment option

Snippet answer: 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.

The cost of that easy entry is mortgage insurance. FHA charges a mortgage insurance premium, or MIP, in two parts: an upfront premium added at closing and an annual premium paid monthly. Unlike conventional PMI, FHA MIP on a low-down-payment loan often lasts the life of the loan, which is a common exam contrast. Remember it as PMI for conventional, MIP for FHA.

VA loans: zero down for those who served

Snippet answer: 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 and no monthly mortgage insurance. Instead of insurance, the borrower usually pays a one-time VA funding fee, which can be financed into the loan. The funding fee is often waived for veterans with a service-connected disability.

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, the borrower pays a one-time VA funding fee, a percentage of the loan that can be rolled into the amount financed. The fee is higher for later uses and is commonly waived for a veteran with a service-connected disability. Eligibility, zero down, and the funding fee are the three points the exam wants.

USDA loans: zero down in rural areas

Snippet answer: A USDA loan is guaranteed by the Department of Agriculture for homes in eligible rural and suburban areas. Like the VA loan, it allows no down payment. It has two limits: the property must be in a USDA-eligible area, and the household income cannot exceed 115 percent of the area median. Instead of PMI, the borrower pays an upfront guarantee fee and a smaller annual fee.

The USDA program pushes homeownership in less dense areas, and its two conditions are geographic and financial. First, the home must sit in a USDA-eligible rural or suburban area. Second, the buyer's household income cannot exceed 115 percent of the area median income for that county. Meet both, and the loan allows zero down payment.

Like FHA and VA, USDA replaces a down payment with a fee structure. The borrower pays an upfront guarantee fee and an annual fee, which function like mortgage insurance for the program. For the exam, pair USDA with rural, zero down, and income limits.

Fixed-rate versus adjustable-rate loans

Snippet answer: Every loan is also either fixed-rate or adjustable-rate. A fixed-rate loan keeps the same interest rate for the whole term, so the payment never changes. An adjustable-rate mortgage, or ARM, starts with a lower rate that later adjusts based on an index plus a margin. Rate caps limit how much the rate can rise per adjustment and over the life of the loan.

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.

How loan types connect to a Texas deal

Snippet answer: 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

Snippet answer: 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, private mortgage insurance, applies to conventional loans when the down payment is under 20 percent, and it can be removed once the loan reaches 80 percent of value. MIP, the mortgage insurance premium, applies to FHA loans and includes an upfront and an annual charge. On a low-down FHA loan, MIP often lasts the life of the loan, which is a key contrast with cancellable PMI.

What makes a loan jumbo instead of conforming? A conforming loan meets the limits set by Fannie Mae and Freddie Mac, including the baseline one-unit limit of $832,750 for 2026. A loan that exceeds the conforming limit is a jumbo loan. Because jumbo loans cannot be sold to those agencies, they stay with private investors and usually require stronger credit and a larger down payment.

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 conventional loan lets the borrower drop PMI at 80 percent of value, so ongoing cost falls once equity builds. VA requires military eligibility (A), USDA requires a rural area and income limits (B), and FHA MIP on a low-down loan often lasts the life of the loan (D).

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 and no monthly mortgage insurance, replaced by a one-time funding fee. 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 2026 conforming limit of $832,750 is a jumbo loan, held by private investors rather than sold to 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 July 21, 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
• HUD, FHA Loans
• VA, Home Loans
• USDA, Single Family Housing Guaranteed Loan Program
• 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.