Chapter 14 study guide: Types of mortgages
A mortgage program and an interest-rate structure describe different features of a loan. Conventional, FHA and VA identify different program arrangements. Fixed-rate and adjustable-rate describe how the rate behaves. A student who treats conventional as another word for fixed-rate will miss questions even with the correct definitions memorized.
Chapter 14 brings these features together with borrower qualification, lending institutions and consumer disclosures. The goal is to compare like with like before deciding what a particular loan description means.
Organize a loan in three parts
Ask which program applies, how long repayment lasts and whether the rate changes. The CFPB organizes loan choices using these three distinctions. A 30-year conventional fixed-rate mortgage answers all three questions. A phrase such as low down payment answers none of them completely.
| Program | Core distinction |
|---|---|
| Conventional | Not insured or guaranteed through a government mortgage program such as FHA or VA. |
| FHA | FHA insurance supports eligible loans made by approved lenders. |
| VA-backed | A VA guaranty supports eligible loans, subject to borrower and property requirements. |
HUD explains FHA's insurance role, while VA describes its loan programs. Neither label means that every applicant is approved. Avoid learning one down-payment percentage or loan limit as though it applies permanently to every borrower and county.
Qualification considers the borrower and the property
Lenders consider income, debts, assets and credit information, along with the property and program requirements. A high income does not make debts irrelevant. An attractive property does not remove the need for borrower qualification.
A housing-expense ratio compares the relevant monthly housing cost with gross monthly income. A total-debt ratio includes the recurring debts counted by the lender as well. In a classroom example, $2,000 of housing expense and $500 of other monthly debt against $8,000 of gross monthly income produce a housing ratio of 25% and a total-debt ratio of 31.25%.
Those calculations do not prove approval. Programs differ in what they count and permit. Prequalification and preapproval terminology can also vary between lenders. Ask what has actually been verified and what conditions remain; a letter is not a guarantee that the loan will close.
Fixed rate does not mean every cost is fixed
With a typical fully amortizing fixed-rate loan, scheduled principal and interest remain stable. Early payments generally contain a larger interest share; more of later payments goes toward principal as the balance declines. Taxes and insurance are separate, so the total monthly housing cost may still change.
An adjustable-rate mortgage (ARM) can change according to its terms. Important components include the index, margin, adjustment interval and caps. For a simple calculation before applicable caps or other terms, an index of 3% plus a margin of 2.5% gives a fully indexed rate of 5.5%. The introductory rate is not a reliable description of every later payment.
Negative amortization occurs when unpaid interest is added to the balance. It is different from ordinary amortization, where payments reduce the debt over time. A low required payment therefore needs explanation: does it cover the interest due, and will the balance grow?
Mortgage insurance protects the lender
Private mortgage insurance on a conventional loan is not homeowners insurance. It protects the lender against specified losses from default. FHA mortgage insurance has different rules and should not be treated as the same product. HUD publishes information about FHA premiums. Payment amounts and cancellation or termination conditions depend on the applicable loan and rules.
For a study question, first identify what is insured: the building, the borrower's life or the lender's credit risk. The word insurance by itself does not tell you the answer.
Which disclosure answers which question?
The note rate is not the same as the annual percentage rate. APR incorporates interest and certain additional borrowing costs using the prescribed calculation. It is a useful comparison measure, but it does not replace reading the loan's terms.
The Loan Estimate presents proposed terms and costs for covered loans. The Closing Disclosure presents the final loan terms and closing costs and generally must be received at least three business days before consummation for transactions subject to that rule. The CFPB's annotated form is useful for seeing these items in context. Not every loan uses identical disclosures, and not every change restarts the waiting period.
Check your understanding
Question: A question describes a conventional ARM. Is that a contradiction?
Answer: no. Conventional identifies the program category; ARM identifies the rate structure. They answer different questions about the same loan.
Try Chapter 14 practice questions. Sort each clue into program, qualification, repayment or disclosure before selecting an answer.
Keep learning
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Based on Chapter 14 lessons reviewed October 8, 2026. Educational comparisons are not loan recommendations, eligibility decisions or financing offers.