- Official section
- National IV.B: Types of Loans
- Broker weight
- Part of 10% of the national portion
- Expected scored items
- The current PSI broker outline assigns about 10 of 100 scored national items to Financing
Financing exam concept
Conventional vs. FHA vs. VA vs. USDA loans
Start with who protects the lender. A conventional loan has no FHA, VA, or USDA program insurance or guaranty. FHA insures an approved lender. VA and USDA guarantee qualifying loans made through participating lenders. From there, compare borrower eligibility, property location, occupancy, down payment, mortgage charges, appraisal, loan limits, assumability, and total cost. No program is automatically cheapest for every qualified borrower.
Last updated: August 1, 2026
What is the difference at a glance?
Short answer: Conventional financing sits outside a specific federal insurance or guaranty program and includes conforming and nonconforming loans. FHA insurance can support a low down payment and broader underwriting access but brings upfront and annual MIP. VA guarantees loans for eligible service-connected groups, often permits no down payment with full entitlement and supported value, and substitutes its guaranty for monthly mortgage insurance, though a funding fee often applies. USDA guarantees qualifying primary-residence loans for income-eligible households in eligible rural areas and can provide 100% financing with program guarantee charges. Compare an actual Loan Estimate, not a slogan.
Program rules, loan limits, premiums, fees, income limits, eligible maps, credit overlays, concessions, appraisal standards, and assumption requirements can change. The figures on this page are an August 1, 2026 snapshot and are labeled by calendar or fiscal year where relevant. Eligibility never guarantees approval, and government backing protects the lender or program fund rather than excusing borrower repayment. Current primary sources are linked below.
What changes from one term to the next?
- Terms
- Conventional vs. government-backed loan
- Difference
- Conventional financing has no specific FHA, VA, or USDA insurance or guaranty. Government programs share specified lender risk under their rules.
- Question cue
- No program backing versus federal insurance or guaranty.
- Terms
- Conforming vs. conventional
- Difference
- Every conforming loan is conventional, but not every conventional loan conforms. Jumbo and portfolio loans can be conventional but nonconforming.
- Question cue
- Broad category versus enterprise-eligible subset.
- Terms
- FHA insurance vs. VA guaranty
- Difference
- FHA insures approved mortgages through its insurance program. VA guarantees a stated portion of qualifying loans for eligible borrowers.
- Question cue
- Federal insurance versus veteran-program guaranty.
- Terms
- FHA MIP vs. VA funding fee
- Difference
- FHA commonly collects upfront and annual MIP. VA commonly charges a one-time funding fee but no monthly mortgage insurance, with statutory exemptions.
- Question cue
- Upfront plus annual insurance versus often one-time program fee.
- Terms
- VA eligibility vs. USDA eligibility
- Difference
- VA eligibility rests on qualifying service or survivor status and entitlement. USDA guaranteed eligibility emphasizes rural location, household income, occupancy, and repayment qualifications.
- Question cue
- Service connection versus rural housing criteria.
- Terms
- USDA guaranteed vs. USDA direct
- Difference
- The guaranteed program works through approved private lenders with a federal guaranty. The direct program involves USDA financing for a separately defined applicant group.
- Question cue
- Private lender plus guaranty versus agency direct loan.
- Terms
- Loan limit vs. qualification amount
- Difference
- A loan limit caps program or enterprise treatment for the location. Qualification depends on income, debt, credit, assets, value, terms, and underwriting.
- Question cue
- Program ceiling versus borrower affordability.
- Terms
- Appraisal vs. home inspection
- Difference
- The appraisal supports value and program property requirements. The buyer's inspection investigates condition for the buyer and is not replaced by government appraisal.
- Question cue
- Collateral and standards versus buyer due diligence.
- Terms
- Zero down vs. zero cash to close
- Difference
- Zero down means no purchase-price down payment under qualifying rules. Closing costs, prepaid items, escrow deposits, price-over-value cash, and fees can still require funds.
- Question cue
- Purchase equity versus total closing funds.
- Terms
- Assumption vs. release of liability
- Difference
- Assumption places repayment duties on an approved new borrower. The departing borrower needs a separate program or lender release to end personal liability.
- Question cue
- New duty versus old borrower discharge.
How does the distinction change the answer?
Classify a conventional conforming loan
Scenario: A private lender originates a mortgage within the 2026 local FHFA limit and underwrites it to the applicable Fannie Mae purchase standards. No FHA, VA, or USDA backing applies.
- The loan is outside a federal insurance or guaranty program.
- Its amount and standards fit enterprise acquisition rules.
- Government-sponsored enterprise eligibility is not FHA insurance.
Answer: This is a conventional conforming loan.
FHA is not first-time-only
Scenario: A repeat buyer plans to occupy a qualifying home as a principal residence, meets underwriting, and has the required investment. The stem gives no existing-FHA conflict.
- First-time ownership is not the defining FHA requirement.
- Principal-residence occupancy and program qualification are present.
- The buyer's prior home does not by itself bar the program.
Answer: The repeat buyer can be considered for FHA financing.
VA price exceeds reasonable value
Scenario: An eligible buyer with full entitlement agrees to pay $425,000, but the VA reasonable value is $410,000 and the seller will not reduce the price.
- VA's no-down feature does not guarantee financing above reasonable value.
- The price exceeds supported value by $15,000.
- The borrower may need cash for the gap in addition to other required funds, subject to final lender and VA treatment.
Answer: The buyer should not assume a zero-cash purchase merely because VA financing is available.
USDA rural and income test
Scenario: A household seeks 100% financing for a primary home, but the address is outside the current USDA eligible-area map.
- The borrower may satisfy income and repayment requirements.
- The guaranteed program also tests the property's rural-area eligibility.
- Borrower eligibility cannot cure an ineligible location.
Answer: The property does not qualify for the stated USDA guaranteed program on these facts.
Conforming limit is not approval amount
Scenario: A buyer sees the $832,750 national one-unit baseline for 2026 and concludes the buyer automatically qualifies to borrow that amount.
- The figure limits baseline conforming treatment in most locations.
- It does not measure this buyer's income, debts, credit, assets, or payment ability.
- Property value and lender underwriting still apply.
Answer: The limit is a program boundary, not a loan approval.
Zero down but not zero closing funds
Scenario: A qualifying USDA borrower receives 100% purchase financing but still has prepaid taxes, insurance, escrow deposits, and transaction charges not fully covered by permitted credits.
- The program finances the qualifying purchase price without a down payment.
- Prepaids and closing costs are separate categories.
- The final Loan Estimate and Closing Disclosure determine the remaining cash need.
Answer: The loan can be zero down while the borrower still needs cash to close.
The P-R-O-G-R-A-M loan test
- Protection: identify conventional lender risk, FHA insurance, VA guaranty, or USDA guaranty.
- Requirements: verify borrower credit, income, assets, service eligibility, household-income limit, and approved-lender overlays.
- Occupancy: determine principal residence, second home, investment, unit count, and required move-in timing.
- Geography and property: check county limit, rural map, reasonable value, appraisal, condition, and program property eligibility.
- Required cash: compare down payment, price-over-value amount, closing costs, prepaid items, reserves, credits, gifts, and assistance.
- Added charges: compare PMI, FHA MIP, VA funding fee, USDA guarantee fees, points, rate, APR, and total payment.
- Movement: check assumability, lender approval, liability release, entitlement restoration, refinance, and resale effect.
- Program
- Conventional
- Federal risk support
- None from these programs
- Signature eligibility cue
- Lender and product standards
- Typical mortgage charge
- PMI may apply at higher LTV
- Program
- FHA
- Federal risk support
- Federal insurance
- Signature eligibility cue
- Eligible borrower plus primary residence
- Typical mortgage charge
- Upfront and annual MIP
- Program
- VA
- Federal risk support
- Federal guaranty
- Signature eligibility cue
- Service eligibility and entitlement
- Typical mortgage charge
- Funding fee unless exempt, no monthly MI
- Program
- USDA guaranteed
- Federal risk support
- 90% loan-note guaranty
- Signature eligibility cue
- Eligible rural area and household income
- Typical mortgage charge
- Upfront and annual guarantee fees
Where do similar terms create traps?
- Trap
- Calling conventional loans government guaranteed
- Correction
- Conventional means the loan is outside a specific FHA, VA, or USDA insurance or guaranty program.
- Trap
- Treating conventional and conforming as synonyms
- Correction
- Conforming is one conventional subset; jumbo and portfolio loans can be nonconforming conventional loans.
- Trap
- Saying FHA lends the purchase money
- Correction
- Approved private lenders generally originate FHA-insured forward mortgages.
- Trap
- Calling FHA first-time-buyer-only
- Correction
- Repeat buyers can qualify when occupancy and all current program requirements are met.
- Trap
- Calling FHA mortgage insurance PMI
- Correction
- FHA uses MIP; PMI is private mortgage insurance associated with conventional credit.
- Trap
- Promising every veteran zero down
- Correction
- Check eligibility, entitlement, reasonable value, price, lender underwriting, and transaction facts.
- Trap
- Saying VA has monthly mortgage insurance
- Correction
- VA uses a guaranty and commonly a one-time funding fee, with exemptions, rather than monthly mortgage insurance.
- Trap
- Calling USDA a farmer-only loan
- Correction
- The housing program focuses on eligible rural areas, household income, primary occupancy, and qualification.
- Trap
- Equating zero down with zero cost
- Correction
- Closing costs, program fees, escrow deposits, prepaids, and price-over-value cash can remain.
- Trap
- Treating an appraisal as a home inspection
- Correction
- Government appraisals address value and program standards, not all buyer condition risks.
- Trap
- Using a national loan limit without county and unit count
- Correction
- Verify program, year, county, property units, special-area treatment, and applicable case or acquisition date.
- Trap
- Ranking programs from one advertised rate
- Correction
- Compare APR, points, insurance or guarantee charges, cash to close, payment, duration, and actual eligibility.
Can you separate the terms in a new fact pattern?
These questions are original study items aligned to the published outline. They are not copied, recalled, or predicted PSI questions.
1. Which loan is not insured or guaranteed by a specific federal FHA, VA, or USDA program?
- Conventional loan
- FHA loan
- VA loan
- USDA guaranteed loan
Show answer and explanation
Answer: Conventional loan
Conventional financing is defined by the absence of those specific government insurance or guaranty programs.
2. Which current program uses upfront and annual mortgage insurance premiums and can allow a 3.5% minimum required investment for a qualifying transaction?
- FHA
- VA
- USDA guaranteed
- Conventional jumbo only
Show answer and explanation
Answer: FHA
FHA-insured financing combines the current maximum-financing investment rule with UFMIP and annual MIP.
3. Which program centers eligibility on qualifying military service or survivor status and available entitlement?
- VA
- FHA
- USDA
- Conventional
Show answer and explanation
Answer: VA
VA home-loan eligibility and guaranty use service-related eligibility and entitlement concepts.
4. Which pair is essential for a USDA guaranteed purchase-loan eligibility screen?
- Eligible rural location and qualifying household income
- Military entitlement and urban high-rise location
- First-time status and farm ownership
- Jumbo amount and investment occupancy
Show answer and explanation
Answer: Eligible rural location and qualifying household income
The Section 502 guaranteed program tests the property area, household income, primary occupancy, and other qualifications.
5. What does the 2026 one-unit baseline conforming loan limit of $832,750 establish?
- A general enterprise-acquisition limit in most areas
- The amount every buyer is approved to borrow
- The FHA minimum down payment
- The VA funding fee exemption
Show answer and explanation
Answer: A general enterprise-acquisition limit in most areas
FHFA's limit helps define conforming eligibility. Borrower approval and local or special limits require additional facts.
Where do these ideas appear on the outline?
- Topic
- Conventional financing
- What to know
- Private loan, no specific federal insurance, no specific federal guaranty, lender risk, conforming, nonconforming, jumbo, portfolio, PMI, down payment, underwriting, occupancy, and loan terms
- Best exam move
- Choose conventional when the loan is not part of FHA, VA, USDA, or another named government program.
- Topic
- Conforming conventional loan
- What to know
- Fannie Mae, Freddie Mac, enterprise eligibility, FHFA limit, one unit, two units, county, high-cost area, credit, income, assets, appraisal, sale to secondary market, and no federal borrower guaranty
- Best exam move
- Conforming means the mortgage fits applicable enterprise acquisition standards and the local loan limit.
- Topic
- Nonconforming loan
- What to know
- Jumbo, above local conforming limit, portfolio loan, alternative documentation, property type, lender program, pricing, reserve, credit, down payment, risk feature, and no illegality assumption
- Best exam move
- A loan can be lawful conventional financing without meeting Fannie Mae or Freddie Mac purchase standards.
- Topic
- FHA insurance
- What to know
- Federal Housing Administration, HUD, approved private lender, federal insurance, mortgagee, borrower, claim protection, Mutual Mortgage Insurance Fund, endorsement, underwriting, and no direct-lender shortcut
- Best exam move
- FHA generally insures the lender's mortgage risk; it does not hand ordinary purchase funds directly to the borrower.
- Topic
- FHA borrower investment
- What to know
- 3.5% minimum required investment, adjusted value, maximum LTV, eligible source, gift, borrower funds, closing costs, seller credit, credit qualifications, and no universal approval
- Best exam move
- Use 3.5% as the current minimum-program concept when the stated borrower and transaction qualify for maximum financing.
- Topic
- FHA mortgage insurance
- What to know
- UFMIP, upfront mortgage insurance premium, annual MIP, monthly installment, base loan amount, financing, LTV, term, duration, program fund, and no PMI label
- Best exam move
- Call FHA's charge MIP, not private mortgage insurance, and account for both upfront and annual components when stated.
- Topic
- FHA occupancy and property
- What to know
- Principal residence, occupancy within 60 days, one-year intent, one to four units, health and safety, minimum property requirements, appraisal, repair, condominium approval, manufactured housing, and no investment-loan shortcut
- Best exam move
- Reject the ordinary FHA purchase-loan answer when the stated plan is a pure non-owner-occupied investment acquisition.
- Topic
- VA guaranty
- What to know
- Department of Veterans Affairs, approved lender, loan guaranty, eligible veteran, service member, surviving spouse, Certificate of Eligibility, entitlement, private credit, reasonable value, and no monthly mortgage insurance
- Best exam move
- VA guarantees part of a qualifying loan; the lender originates and underwrites within VA and lender requirements.
- Topic
- VA down payment
- What to know
- No down option, full entitlement, supported purchase price, reasonable value, remaining entitlement, partial entitlement, county limit, lender requirement, cash difference, and borrower qualification
- Best exam move
- Do not turn zero-down availability into a promise when price, value, entitlement, or lender facts require cash.
- Topic
- VA funding fee
- What to know
- One-time fee, first use, subsequent use, down payment, loan type, exemption, service-connected disability, financing, closing, no monthly MI, and current statutory rate table
- Best exam move
- Separate the VA funding fee from monthly mortgage insurance and check whether the borrower is exempt.
- Topic
- VA occupancy and appraisal
- What to know
- Primary residence, borrower occupancy, spouse occupancy, Notice of Value, VA appraisal, reasonable value, minimum property requirements, repairs, independent inspection, and no condition warranty
- Best exam move
- A VA appraisal supports value and program requirements; it is not a substitute for the buyer's home inspection.
- Topic
- USDA guaranty
- What to know
- Section 502 Guaranteed Loan Program, Rural Development, approved lender, 90% loan-note guaranty, 100% financing, low- and moderate-income household, eligible borrower, and program risk
- Best exam move
- Identify USDA when rural-area, household-income, primary-residence, and no-down qualifying facts appear together.
- Topic
- USDA location and income
- What to know
- Eligible rural area, address lookup, household income, 115% median household income limit, deductions, household members, primary residence, adequate dwelling, modest, decent, safe, sanitary, and annual limits
- Best exam move
- USDA eligibility tests both the property location and household income, not the borrower's occupation as a farmer.
- Topic
- USDA guarantee charges
- What to know
- Upfront guarantee fee, annual fee, monthly collection, guarantee, financing, current fiscal-year rate, loan amount, program cost, no zero-cost claim, and Loan Estimate
- Best exam move
- Zero down does not mean zero upfront or ongoing program cost.
- Topic
- 2026 loan limits
- What to know
- FHFA $832,750 baseline, $1,249,125 high-cost ceiling, FHA $541,287 floor, FHA $1,249,125 ceiling, one-unit, county, multiunit, Alaska, Hawaii, Guam, Virgin Islands, annual revision, and no qualification promise
- Best exam move
- Use the program, year, county, and unit count before choosing the applicable limit.
- Topic
- Assumability
- What to know
- FHA assumption, VA assumption, USDA transfer, conventional due-on-sale, lender approval, buyer qualification, release of liability, entitlement substitution, existing rate, fee, and no automatic transfer
- Best exam move
- Government program loans may be assumable under program rules, but approval and liability release are separate questions.
- Topic
- Loan Estimate comparison
- What to know
- Interest rate, APR, points, lender credit, payment, mortgage insurance, guarantee fee, funding fee, cash to close, rate lock, prepayment, assumption, five-year cost, and total interest percentage
- Best exam move
- Compare simultaneous official offers using the same price, term, down payment, and lock assumptions.
- Topic
- Broker boundaries
- What to know
- Identify possibilities, no eligibility promise, no rate quote, no underwriting, no appraisal guarantee, approved lender, loan originator, HUD counselor, VA, USDA, state housing agency, and fair housing
- Best exam move
- Present relevant programs consistently and refer qualification, fees, and product selection to licensed lending professionals.
How do you make the distinction stick?
- Session
- Session 1
- Focus
- Identify risk support
- Proof you are ready
- Classify 24 loans as conventional, FHA-insured, VA-guaranteed, USDA-guaranteed, or another program and name the lender-risk protection.
- Session
- Session 2
- Focus
- Match eligibility and occupancy
- Proof you are ready
- Solve 20 borrower-and-property screens using service, rural location, household income, principal residence, and investment facts.
- Session
- Session 3
- Focus
- Compare cash and charges
- Proof you are ready
- Build four side-by-side cash-to-close and monthly-payment comparisons including PMI, MIP, funding fee, and guarantee charges.
- Session
- Session 4
- Focus
- Own the 2026 limits
- Proof you are ready
- State the 2026 baseline conforming limit and FHA one-unit floor and ceiling, then explain why county and unit count still matter.
- Session
- Session 5
- Focus
- Test appraisal and assumption
- Proof you are ready
- Distinguish value, property standards, inspection, assumption approval, liability release, and entitlement consequences in 12 scenarios.
- Session
- Session 6
- Focus
- Run the P-R-O-G-R-A-M test
- Proof you are ready
- Score at least 90% and state protection, requirements, occupancy, geography, cash, charges, and movement for every miss.
Do not count recognition as mastery. Close the notes and explain the rule, apply it to a new fact pattern, and identify why each distractor fails.
Turn the comparison into a test-day decision
From concept to decision
Drill this topic, then review the explanation
Pass Illinois gives you original national and Illinois questions, topic-by-topic study, clear explanations, timed practice, flashcards, progress tracking, and Math Coach. Start free, find the weak distinction, and focus the next session there.
Questions students ask about Conventional vs. FHA vs. VA vs. USDA Loans
What is a conventional mortgage loan?
A conventional mortgage is not insured or guaranteed under a specific federal loan program such as FHA, VA, or USDA. It can be conforming, meaning it meets applicable Fannie Mae or Freddie Mac purchase requirements and loan limits, or nonconforming, such as a jumbo or another lender-specific product.
What is an FHA loan?
An FHA loan is made by an approved private lender and insured by the Federal Housing Administration. Eligible borrowers can use a minimum required investment as low as 3.5% of adjusted value under current policy, subject to underwriting. FHA charges upfront and annual mortgage insurance premiums and applies county-based loan limits and property standards.
What is a VA loan?
A VA-guaranteed purchase loan is made by a private lender for an eligible veteran, service member, or qualifying survivor. VA's guaranty protects part of the lender's risk. Qualified borrowers with full entitlement can often purchase with no down payment when price and reasonable value support the loan. VA has no monthly mortgage insurance, but a funding fee commonly applies unless the borrower is exempt.
What is a USDA guaranteed home loan?
USDA's Section 502 Guaranteed Loan Program works through approved lenders for eligible low- and moderate-income households buying an adequate primary residence in an eligible rural area. Current program information allows 100% financing for qualified applicants and provides lenders a 90% loan-note guarantee. Household income, occupancy, property location, and underwriting rules apply.
Are FHA loans only for first-time homebuyers?
No. First-time status is not the basic FHA eligibility rule. FHA generally requires at least one borrower to occupy the property as a principal residence and limits multiple FHA-insured principal residences, subject to policy exceptions. A repeat buyer can qualify if the current requirements are met.
Does a VA loan always require zero down?
No. Zero down is a major available feature, not an unconditional promise. A down payment can be required if price exceeds VA reasonable value, the borrower has insufficient remaining entitlement, or lender and transaction facts require one. The borrower must also qualify for the payment and satisfy VA and lender standards.
Does a USDA loan require the borrower to be a farmer?
No. The single-family guaranteed housing program is based on eligible rural location, household income, primary-residence occupancy, credit and repayment ability, and property requirements. It is a rural housing program, not a requirement that the homeowner operate a farm.
What is the 2026 conforming loan limit?
For 2026, FHFA set the one-unit baseline conforming loan limit at $832,750 in most of the United States and the general high-cost ceiling at $1,249,125. County, property-unit count, and special-area limits matter, and FHFA revises the figures annually. A loan above a local limit may be nonconforming rather than illegal.
What are the 2026 FHA one-unit loan limits?
HUD's 2026 national one-unit floor is $541,287 and the general high-cost ceiling is $1,249,125, with county-based limits between them and special rules for designated areas. The current local limit and FHA case-number timing control. The limit is not the amount every borrower can afford or qualify to receive.
Are these official PSI questions?
No. They are original questions aligned to the national Financing outline effective June 24, 2026. Current CFPB, FHFA, HUD and FHA, VA, USDA, and PSI primary materials were reviewed through August 1, 2026.
Primary sources
- PSI Illinois Candidate Information Booklet dated June 24, 2026
- Consumer Financial Protection Bureau, current mortgage loan-type comparison
- Consumer Financial Protection Bureau, current conventional loan guidance
- Consumer Financial Protection Bureau, current FHA loan guidance
- Federal Housing Finance Agency, official 2026 conforming loan limits
- HUD Handbook 4000.1, current FHA Single Family Housing policy
- HUD, official 2026 FHA forward mortgage loan limits
- Department of Veterans Affairs, current VA purchase-loan benefits and requirements
- Department of Veterans Affairs, current entitlement and loan-limit guidance
- Department of Veterans Affairs, current funding-fee and closing-cost guidance
- USDA Rural Development, current Section 502 Guaranteed Loan Program requirements
The current official outline controls the tested scope. Statutes, regulations, and official agency materials control when a general study rule and a jurisdiction-specific rule differ.
Editorial status
Checked against primary sources
The Pass Illinois editorial team last checked this guide on August 1, 2026. Every practice question is an original study item, and the source links above let you verify the rules that support the lesson.