Every major loan product an MLO needs to know — conventional, FHA, VA, USDA, jumbo, ARMs, and Non-QM — with the specific eligibility criteria, down payment requirements, and credit thresholds that are tested on the NMLS exam.
📖 4 Lessons
🎬 2 Videos
🧠 5 Knowledge Check Questions
📚 Primary Source: NMLS MLO Study Guide
Lesson 1 of 4
Conventional loans — conforming, non-conforming, and what borrowers need to qualify
Conventional loans are the most common type of mortgage financing in the United States. Unlike government-backed loans (FHA, VA, USDA), conventional loans are not insured or guaranteed by a federal agency. They are offered by private lenders and governed by guidelines set by government-sponsored enterprises (GSEs) — primarily Fannie Mae and Freddie Mac. Understanding the distinction between conforming and non-conforming conventional loans is fundamental MLO knowledge and tested directly on the NMLS exam.
Conforming vs. Non-Conforming
Conforming loans adhere to the guidelines established by Fannie Mae and Freddie Mac, including maximum loan limits set annually by the Federal Housing Finance Agency (FHFA). As of 2026, the standard conforming loan limit for a single-family home is $832,750 in most areas, with higher limits up to $1,249,125 in high-cost markets (parts of California, New York, and other expensive metros). Because conforming loans can be sold into the secondary market, lenders can offer lower interest rates and more favorable terms.
Non-conforming loans do not meet GSE guidelines — typically because the loan amount exceeds conforming limits (jumbo loans) or because the borrower's circumstances fall outside standard underwriting criteria. Non-conforming loans carry higher interest rates because they represent greater risk to lenders who cannot sell them easily in the secondary market.
Conventional loan qualification requirements
Conventional
Key Requirements
Minimum credit score: 620 (conforming). 740+ gets best rates and terms.
Down payment: as low as 3%, though most buyers put 5–20% down
PMI required if down payment is less than 20% — can be removed at 80% LTV
DTI ratio: generally 43% or lower; up to ~50% with strong compensating factors
2 years consistent employment and income history preferred
Can be used for primary, secondary, and investment properties
No maximum income limit
Private Mortgage Insurance (PMI)
How PMI Works
Required when down payment is less than 20%
Protects the lender — not the borrower — in case of default
Monthly cost varies by credit score, down payment, and loan amount
Higher credit score = lower PMI premium
Can be removed when LTV reaches 80% (borrower request) or 78% (automatic)
No upfront PMI premium — monthly only
Key advantage over FHA MIP: PMI is removable
💡 The Overlay Concept — Critical for MLOs
Government loan programs set minimum guidelines — but individual lenders may impose stricter requirements called overlays. For example, FHA's minimum credit score for 3.5% down is 580, but many lenders overlay a 620 or 640 minimum. This is why borrowers shopping for a mortgage may get different results from different lenders even when applying for the same loan type. As an MLO, knowing your lender's overlays — and knowing which lenders have fewer overlays — is a significant competitive advantage when helping borrowers who barely meet minimum guidelines.
Lesson 2 of 4
Government-backed loans — FHA, VA, and USDA in depth
Government-backed loans are insured or guaranteed by a federal agency, which reduces lender risk and allows lenders to offer more favorable terms — lower down payments, more flexible credit requirements, and competitive interest rates. There are three major government loan programs every MLO must know cold: FHA, VA, and USDA. Each serves a distinct borrower profile and has specific eligibility criteria.
FHA Loans — Federal Housing Administration
Established in 1934, FHA loans are the most widely used government loan program. They are designed to make homeownership accessible to first-time buyers and borrowers with less-than-perfect credit. The FHA insures the loan — meaning if the borrower defaults, the FHA pays the lender — allowing lenders to accept lower credit scores and smaller down payments.
FHA — Key Requirements
Federal Housing Administration
Minimum credit score: 580 for 3.5% down; 500–579 with 10% down
Minimum down payment: 3.5% (with 580+ credit score)
DTI ratio: front-end up to 47%, back-end up to 57% with compensating factors
Upfront MIP: 1.75% of loan amount (added to loan balance)
Annual MIP: ~0.55% monthly, for life of loan if less than 10% down
2026 conforming loan limit: $832,750 standard; up to $1,249,125 in high-cost areas
Property types: single family, 2–4 unit, condos (must be FHA-approved), manufactured
Owner-occupied primary residence only
FHA — Key Facts
What MLOs Must Know
FHA rates are typically 0.5% lower than conventional — a meaningful borrower benefit
MIP stays for life of loan unless borrower puts 10%+ down (drops at year 11)
FHA loans are assumable — buyer can take over seller's mortgage and rate
FHA 203k allows purchase + renovation costs in one loan
Employment gap of 6+ months: must be back to work 6 months before qualifying
Best for: borrowers with credit scores under 680, limited down payment savings
Key drawback: MIP for life of loan adds significant long-term cost vs conventional
VA Loans — Department of Veterans Affairs
Established in 1944, VA loans are among the most powerful loan programs available. They are exclusively available to eligible veterans, active duty service members, and certain surviving spouses. The VA guarantees a portion of the loan, eliminating the need for a down payment and private mortgage insurance entirely.
VA — Key Requirements
Department of Veterans Affairs
Eligibility: veterans, active duty (90 days wartime / 181 days peacetime), National Guard/Reserves (6 years), surviving spouses
Certificate of Eligibility (COE) required — apply online through VA eBenefits
No official minimum credit score — most lenders prefer 620+
Down payment: 0% — no down payment required
No private mortgage insurance — ever
DTI: 41% preferred; exceptions with strong residual income
VA funding fee required (unless exempt due to service-connected disability)
Loans are assumable by qualified buyers
VA — Key Facts
What MLOs Must Know
No down payment + no PMI = single most powerful homebuying benefit in the market
VA rates are typically lower than conventional due to government guarantee
Funding fee varies: 2.15% first use with 0% down; lower with down payment
Residual income standard: VA evaluates remaining income after all obligations
Property types: single family, 2–4 unit (must occupy one), condos, manufactured
USDA Loans — United States Department of Agriculture
USDA loans are designed to promote homeownership in rural and suburban areas. They offer zero down payment financing for eligible borrowers — but come with strict geographic and income restrictions that make them highly specific to the right borrower situation.
USDA — Key Requirements
Rural Development Program
Geographic requirement: property must be in a USDA-eligible rural area (towns with populations ≤35,000 typically qualify)
Income limit: household income cannot exceed 115% of area median income
Minimum credit score: no official minimum — most lenders prefer 640+
Down payment: 0% — 100% financing
DTI: 41% preferred; exceptions up to 44% with strong factors
Upfront guarantee fee: 1% of loan amount
Annual fee: 0.35% of remaining loan balance (lower than FHA MIP)
Primary residence only — no investment or vacation properties
USDA — Key Facts
What MLOs Must Know
Two programs: Guaranteed loans (issued by approved lenders) and Direct loans (issued by USDA for very low income borrowers)
Unlike VA, USDA has income maximums — you can make too much to qualify
USDA eligibility map available at usda.gov — verify every property address
Closing costs can be financed into the loan if appraised value supports it
Some suburban areas adjacent to major cities qualify — worth checking for clients
USDA direct loans can have rates as low as 1% for very low income applicants
Lesson 3 of 4
Side-by-side comparison — which loan is right for which borrower
As an MLO, your value to borrowers comes from knowing not just what each loan program is — but which one is right for a specific borrower's financial situation. The following comparison table is a quick-reference framework for making that determination. The real answer always requires a full conversation about credit, income, assets, property location, and long-term goals.
Factor
Conventional
FHA
VA
USDA
Min. Credit Score
620 (conforming)
580 (3.5% down) 500 (10% down)
No minimum (620 preferred)
No minimum (640 preferred)
Min. Down Payment
3%
3.5%
0%
0%
Mortgage Insurance
PMI if <20% down Removable at 80% LTV
MIP for life of loan (1.75% upfront + monthly)
None — ever
1% upfront + 0.35% annual
Max DTI
~50% with strong factors
Up to 57% back-end
41% preferred
41% (44% with factors)
Eligibility
Any borrower meeting credit/income standards
Any borrower meeting FHA guidelines
Veterans, active duty, eligible spouses only
Income limits + rural/suburban location only
Best For
Strong credit (680+), larger down payment
Lower credit, limited savings, first-time buyers
Eligible military — best terms available
Rural/suburban buyers within income limits
💡 The Credit Score Decision Rule
A useful rule of thumb from experienced loan officers: if a borrower has a credit score below 680, FHA is almost always the better option — lower rates, easier approval, and more forgiving DTI limits outweigh the lifetime MIP drawback for most borrowers in this range. At 680 and above, conventional typically wins on long-term cost because PMI is removable and rates improve significantly with higher credit scores. VA beats both for eligible veterans at any credit level. And USDA is the only zero-down option for non-veterans in eligible rural areas.
🎬 Watch: Loan Types Explained with Real Numbers
April 2025 · 20+ years experience · Complete FHA vs conventional comparison with real payment calculations at 3.5%, 5%, and 10% down on a $500,000 purchase — including upfront MIP, monthly MIP, PMI, and DTI ratios
January 2024 · Deep dive on conventional loan mechanics — conforming vs non-conforming, DTI calculation with real examples, mortgage insurance structure, documentation requirements, and common qualification questions answered
Lesson 4 of 4
Jumbo loans, ARMs, and Non-QM — the products beyond the standard four
🧑💼 Employee Path
As an MLO at a retail lender or brokerage, your product knowledge is your most valuable technical asset. Borrowers will come to you with situations that do not fit neatly into conventional or FHA — a self-employed borrower who cannot document income the standard way, a luxury home buyer who needs $1.5M in financing, a veteran who also happens to be in a rural area and qualifies for both VA and USDA. Knowing the full product menu — and knowing when to use each — is what makes you indispensable to your referral partners and your clients.
🏢 Entrepreneur Path
As an MLO building your own practice, product breadth is a competitive advantage. An MLO who can only do conventional and FHA loses deals to competitors who can also do VA, USDA, jumbo, Non-QM, and bridge loans. Building relationships with lenders who offer a wide product menu — and developing expertise across loan types — expands the universe of borrowers you can serve and the referral partners who will send you business.
Jumbo Loans
Jumbo loans are non-conforming loans that exceed the conforming loan limits set by the FHFA ($832,750 in most areas as of 2026). Because they cannot be sold to Fannie Mae or Freddie Mac in the secondary market, lenders hold more risk and generally charge higher interest rates and impose stricter qualification standards. Typical jumbo loan requirements include credit scores of 700 or higher, larger down payments (often 10–20%+), significant liquid reserves (often 12+ months of mortgage payments), and lower DTI ratios. Jumbo loans are essential knowledge for MLOs working in high-cost real estate markets.
Adjustable-Rate Mortgages (ARMs)
ARMs have an initial fixed-rate period — typically 5, 7, or 10 years — followed by periodic rate adjustments based on a market index. A 7/1 ARM has a fixed rate for 7 years, then adjusts annually. ARMs initially offer lower rates than fixed-rate mortgages, which can make a higher-priced home more accessible. The risk is that after the fixed period, rates — and monthly payments — can rise significantly. ARMs are appropriate for borrowers who plan to sell or refinance before the adjustment period begins, or who have strong reason to believe rates will fall. The NMLS exam tests specific ARM disclosure requirements under TILA.
Non-QM Loans (Non-Qualified Mortgages)
Non-QM loans do not conform to the Consumer Financial Protection Bureau's standards for Qualified Mortgages. They exist specifically to serve borrowers who cannot document income the traditional way — self-employed individuals who write off significant business expenses, real estate investors with complex income structures, foreign nationals, and borrowers with recent credit events. Non-QM lenders use alternative income verification methods such as bank statement loans (12–24 months of deposits instead of W-2s), asset depletion (using investment accounts to calculate income), and DSCR loans (debt-service coverage ratio — for investment properties, qualifying on rental income rather than personal income). Non-QM loans typically carry higher rates than conventional loans and require stronger compensating factors.
⚠️ Non-QM ≠ Predatory — But Know the Difference
Non-QM loans serve a legitimate and growing market segment — self-employed borrowers, investors, and those with non-traditional income make up a significant share of the homebuying population. However, the NMLS exam tests your understanding of the distinction between responsible non-QM lending and predatory practices like HOEPA high-cost loans, balloon payment structures, and negative amortization. Know the definitions, the protections, and the prohibited practices in each category.
D
Every loan type in this module represents a borrower who could not get a home without it. FHA exists because some families cannot save 20% down. VA exists because veterans earned extraordinary benefits. USDA exists because rural communities deserve access to homeownership too. Non-QM exists because the self-employed entrepreneur who built a business from nothing should not be locked out of the market by W-2 requirements. When you know these products cold, you do not just pass the exam — you become the professional who finds a way when other loan officers say no. That is what your clients will remember you for.
Your Darco Mentor · Module 2 Complete
📌 Module 2 Key Takeaways
Conventional loans are not government-backed. Conforming loans meet GSE (Fannie Mae/Freddie Mac) guidelines with a 2026 limit of $832,750 standard ($1,249,125 in high-cost areas). Non-conforming (jumbo) loans exceed that limit and carry higher rates. Minimum 620 credit score; PMI required under 20% down but removable at 80% LTV.
FHA loans are government-insured and allow 3.5% down with a 580 credit score (10% down for 500–579). MIP is required for the life of the loan (1.75% upfront + monthly). FHA rates are typically 0.5% lower than conventional. The 2026 FHA floor (standard limit) is $541,287 — set at 65% of the conforming limit. Best for borrowers with credit under 680 or limited savings.
VA loans are the most powerful loan program available — 0% down, no PMI, competitive rates, and flexible qualification. Available only to eligible veterans, active duty, and eligible surviving spouses. VA funding fee applies unless exempt. COE (Certificate of Eligibility) required.
USDA loans offer 0% down for eligible rural/suburban properties with household income at or below 115% of area median income. 640+ credit preferred. 1% upfront guarantee fee + 0.35% annual fee. Primary residence only. Geographic eligibility must be verified via USDA's online map.
Overlays are lender-specific requirements that are stricter than the program minimums. A lender may require 620 credit for FHA even though the FHA minimum is 580. Knowing which lenders have fewer overlays is a competitive MLO advantage for borderline borrowers.
Credit score decision rule: under 680 = FHA usually wins on rate and approval ease; 680+ = conventional usually wins on long-term cost (removable PMI); VA beats both for eligible borrowers; USDA is the zero-down option for non-veterans in eligible rural/suburban areas.
Jumbo loans exceed conforming limits, require stricter qualification (700+ credit, larger down, significant reserves). ARMs offer lower initial rates with rate risk after fixed period. Non-QM loans serve self-employed, investors, and non-traditional income borrowers using alternative documentation.
🧠 Knowledge Check
5 questions — click your answer, then check all at once.
1. A borrower has a 610 credit score and $15,000 saved for a down payment on a $250,000 home. They are not a veteran and the property is in an urban area. Which loan program is most likely their best option — and why?
A
Conventional loan — because 3% down ($7,500) is less than their savings and they will have equity remaining after closing.
B
FHA loan — because with a 610 credit score, FHA's minimum of 580 for 3.5% down applies. A 610 score would likely face very high PMI costs on conventional and potentially not qualify at all with many lenders using overlays. FHA offers lower rates than conventional at this credit level, more flexible DTI, and a simpler approval path. The $15,000 covers the 3.5% down payment ($8,750) plus has buffer for closing costs.
C
USDA loan — because it offers 0% down, allowing the borrower to keep all $15,000 as reserves.
D
VA loan — because VA has no minimum credit score, making it the most accessible option for a 610 score borrower.
2. What is the key difference between FHA MIP and conventional PMI — and why does it matter to a borrower making a 5% down payment with a 700 credit score?
A
FHA MIP and conventional PMI are essentially the same — both are monthly fees that disappear automatically once the borrower reaches 20% equity in the property.
B
FHA MIP includes both an upfront premium (1.75% of loan amount added to the loan balance) and a monthly premium that stays for the life of the loan if less than 10% is put down. Conventional PMI has no upfront cost and is removable when the borrower reaches 80% LTV. For a 700 credit score borrower at 5% down, conventional PMI will be significantly lower than FHA MIP — and because it is removable, the long-term cost advantage of conventional is substantial. This borrower should strongly consider conventional.
C
FHA MIP is paid upfront only at closing — there is no monthly component. Conventional PMI is monthly only, making FHA cheaper on a monthly cash flow basis.
D
The difference only matters for borrowers with credit scores below 620 — above that threshold, FHA MIP and conventional PMI cost the same and the programs are otherwise interchangeable.
3. An active duty service member wants to buy a $400,000 home with no down payment. They have a 640 credit score and have served 120 consecutive days during active deployment. Are they eligible for a VA loan — and what key document do they need?
A
No — the VA requires a minimum credit score of 620, and while 640 meets that threshold, they must have served at least 181 days of continuous active duty peacetime service to be eligible.
B
Yes — active duty service members qualify with at least 90 consecutive days during wartime. 120 days exceeds that threshold. The VA has no official minimum credit score (640 easily meets most lender preferences of 620+). The key document required is a Certificate of Eligibility (COE), which confirms their entitlement and must be obtained through the VA's eBenefits portal, by mail, or through the lender. With 0% down and no PMI, the VA loan is by far the best option for this borrower.
C
No — VA loans require at least a 680 credit score when purchasing with 0% down, since the absence of a down payment increases lender risk substantially.
D
Yes — they qualify, and no special document is needed since their active duty status can be verified directly through military service records at closing.
4. A lender advertises that they offer FHA loans with a minimum credit score of 620. The FHA program's actual minimum for 3.5% down is 580. What is the term for this practice — and is it legal?
A
This is called predatory lending — requiring higher standards than the program minimum is discriminatory and violates ECOA and Fair Housing laws.
B
This is called a program limit — lenders are required by HUD to set credit score minimums above the FHA floor to protect borrowers from high-risk loans.
C
This is called a lender overlay — and it is completely legal. Individual lenders can set stricter requirements than the minimum guidelines established by FHA, VA, USDA, or conventional program standards. Overlays exist because lenders bear risk on loans that default and choose to mitigate that risk with higher standards. The practical implication for borrowers: a 590 credit score borrower rejected by one lender may be approved by another lender with fewer overlays on the same FHA loan program.
D
This is called a compensating factor requirement — the lender is legally obligated to raise the credit score minimum when a borrower puts down less than 10%.
5. A self-employed borrower owns a successful restaurant and deposited $280,000 into their business bank account over the past 12 months. However, their tax returns show $45,000 in net income after deductions. They want to buy a $500,000 home. Which loan type is specifically designed for their situation — and why can they not use their tax returns for qualification?
A
FHA loan — because FHA has the most flexible DTI ratios and allows alternative income documentation for self-employed borrowers who cannot qualify on W-2 income alone.
B
USDA loan — because self-employed income is evaluated differently under USDA guidelines, allowing bank deposits to be used as a primary income source.
C
Non-QM bank statement loan — specifically designed for self-employed borrowers who show low net income on tax returns due to legitimate business deductions. The tax return ($45,000 net) would not support the mortgage on a $500,000 home. A bank statement loan uses 12–24 months of deposits (potentially $280,000) to calculate qualifying income, reflecting the borrower's actual cash flow rather than their taxable income. Conventional, FHA, VA, and USDA all require traditional income documentation where tax returns are the primary income source for self-employed borrowers.
D
Conventional loan — because Fannie Mae guidelines include an exception for small business owners that allows bank deposits to substitute for tax return income in qualifying scenarios.
📚 The books behind this module
NMLS SAFE MLO Exam Test Prep — Audio Study Guide
Samuel Davidson & Rebecca Davidson (2025)
Chapter 1 is the primary source for this module — covering conventional loans (conforming vs non-conforming, qualification criteria, PMI), FHA loans (MIP structure, eligibility, 203k), VA loans (service requirements, COE, no-PMI benefit, IRRRL), USDA loans (geographic and income eligibility, guarantee fees), and Non-QM loans in comprehensive detail aligned with the NMLS exam content outline.
GoTestPrep.com — Domain 3: General Mortgage Knowledge
Domain 3 (20% of the NMLS exam) covers exactly the content in this module — loan types, mortgage insurance, loan-to-value ratios, and qualifying standards. Practice Domain 3 questions specifically to reinforce the specific numbers and distinctions tested on the exam.
⏭️ What's Next — Module 3: The Loan Process from Application to Closing
You know the loan products. Now you need to know the process. Module 3 covers the complete mortgage origination process — from the initial borrower consultation and loan application through processing, underwriting, appraisal, and closing. You will learn what happens at each stage, what conditions arise and why, and how to keep a file moving toward a successful closing.