Kinds of loans: conventional, FHA, VA, USDA, ARM, balloon, interest-only, reverse, HELOC, construction, rehab, bridge, seller financing

Bottom line: a loan type is just a set of rules about who backs the loan, how much you put down, and how the payment behaves over time. A broker does not sell loans. A broker must know the menu so a buyer can ask a lender smart questions and so a contract's financing dates make sense.

The two big splits

Who backs the loan. A conventional loan is a mortgage that no government agency insures or guarantees. If the borrower stops paying, the lender (or the investor who bought the loan) eats the loss. A government-backed loan (FHA, VA, USDA) has a government agency that either insures the lender (pays the lender if the borrower defaults) or guarantees part of the loan. Because the lender is safer, it accepts a smaller down payment or weaker credit.

How the balance behaves. Amortization means the loan is paid off in level payments over a set time. Each payment is part interest and part principal (the amount borrowed). Early payments are mostly interest; late payments are mostly principal.

Conventional loans: conforming vs jumbo

A conforming loan fits the size limit and rules of Fannie Mae and Freddie Mac, the two companies that buy most mortgages from lenders. The limit is set each year by the Federal Housing Finance Agency and changes yearly, so always check the current number. A jumbo loan is bigger than the limit, cannot be sold to Fannie or Freddie, and usually needs a bigger down payment and stronger credit. With less than 20% down, a conventional borrower pays PMI (private mortgage insurance), a monthly charge that protects the lender, not the buyer. PMI can usually be removed once the owner has built enough equity (the share of the home value the owner owns free of debt).

How the payment behaves

• Fully amortized: level payments pay the loan to zero at the end (a 30-year fixed loan).
• Interest-only: for a set period (often 5 to 10 years) the borrower pays only interest. The balance does not fall. After that the payment jumps because the same balance must now be paid off in fewer years.
• Balloon: payments are figured as if the loan lasted 30 years, but the whole remaining balance (the balloon payment) comes due all at once, often after 5 or 7 years. The buyer must refinance, sell, or pay cash.
• ARM (adjustable-rate mortgage): the interest rate can change. After a fixed start period the rate is reset as index + margin. The index is a published market rate the lender does not control. The margin is a fixed number of percentage points the lender adds. Caps limit how far the rate can move: an initial cap (the first change), a periodic cap (each later change) and a lifetime cap (the most it can ever rise). A "5/6 ARM" holds its rate for 5 years, then adjusts every 6 months.

Government-backed loans

FHA (Federal Housing Administration, part of HUD) insures loans made by approved lenders. Down payment can be as low as 3.5% with a qualifying credit score. The borrower pays MIP (mortgage insurance premium): an upfront charge, usually 1.75% of the loan, plus a yearly charge split into monthly payments. The house must meet FHA minimum property standards, and there are FHA loan limits that vary by county.

VA loans are for eligible veterans, service members and some surviving spouses. The Department of Veterans Affairs guarantees part of the loan, which means it promises the lender to repay a share of any loss. Typical features: no down payment, no monthly mortgage insurance, and a one-time VA funding fee (a percentage of the loan that can be rolled into it; it is lower with a down payment, and waived for veterans with service-connected disability ratings). Only a veteran can use it, and the VA does not make the loan itself in most cases; a private lender does.

USDA (U.S. Department of Agriculture) rural loans help moderate-income buyers in eligible rural areas. The program can finance with no down payment, but the property must be in an eligible area and the household income must be under a limit. There is an upfront guarantee fee and an annual fee.

Special-purpose loans

• Seller financing: the seller acts as the bank. With a purchase-money mortgage or deed of trust the buyer gets title at closing and signs a note to the seller. With a land contract (also called a contract for deed or installment contract), the seller keeps legal title until the buyer pays enough or all of the price. It is riskier for the buyer, who has equity but not title. Dodd-Frank limits how often a seller can do this without being a licensed loan originator, so refer sellers to an attorney.
• Reverse mortgage (HECM): a loan for owners 62 and older. The owner gets cash or a credit line and makes no monthly payment; the balance grows and is repaid when the owner sells, moves out permanently or dies. The owner must still pay taxes, insurance and upkeep.
• HELOC (home equity line of credit): a revolving credit line (like a credit card) secured by the home, usually in second position behind the first mortgage. The rate is often variable.
• Construction loan: short-term money paid out in stages (draws) as building is finished, often interest-only. It is replaced by a permanent loan at completion.
• Rehab loan: lends the purchase price plus repair money in one loan (for example FHA 203(k) or Fannie Mae HomeStyle), with the repair funds held back and paid as work is completed.
• Bridge loan: a short loan (months to a year) that covers the gap, such as buying a new home before the old one sells. It costs more and is repaid when the old home closes.

Example with real numbers

A $500,000 Boulder County house. Assume a 6.5% rate and a 30-year term for the fixed examples. The rate and fees are illustrations, not quotes.

Loan	Cash down	Loan amount	Monthly payment (P&I plus insurance)
Conventional, 20% down	$100,000	$400,000	$2,528 (no PMI)
Conventional, 5% down	$25,000	$475,000	$3,002 + about $277 PMI (0.70% a year) = about $3,279
FHA, 3.5% down	$17,500	$482,500 + 1.75% upfront MIP ($8,444) = $490,944	$3,103 + about $221 MIP (0.55% a year) = about $3,324
VA, 0% down	$0	$500,000 + 2.15% funding fee ($10,750) = $510,750	$3,228 (no mortgage insurance)
Interest-only, 20% down	$100,000	$400,000	$2,167 for the interest-only years

Step by step for the interest-only line: $400,000 x 6.5% = $26,000 a year; $26,000 / 12 = $2,166.67 a month. After 5 years the owner still owes $400,000.

The balloon: the same $400,000 on a 5-year balloon at 6.5% (30-year payment schedule) costs $2,528 a month, but after 60 payments about $374,444 is still owed. The buyer has paid about $25,556 of principal in five years and owes the rest at once.

The ARM: the same $400,000 on a 5/6 ARM that starts at 5.00% costs $2,147. After 5 years about $367,315 is owed. If the index is 4.25% and the margin is 2.75%, the new rate is 7.00%. A 2% initial cap allows exactly that (5% + 2% = 7%), and the payment on the remaining 25 years becomes about $2,596, which is $449 a month more. The buyer who looked only at $2,147 was surprised.

What the table shows: the smaller the down payment, the bigger the monthly payment, even before the insurance. The government loans win on cash needed up front; the 20% down loan wins on monthly cost and total cost. As a broker you explain none of this as advice; you tell the buyer to get a Loan Estimate from at least two lenders. In Colorado, a broker must suggest that parties get expert advice on matters beyond the broker's expertise (C.R.S. 12-10-407(2)(b)(II) for a transaction-broker; the same idea appears for single agents in C.R.S. 12-10-404(1)(c)(V) and 12-10-405(1)(c)(V)).

Why this matters in a contract

The loan type changes deadlines, appraisal rules and what the seller must repair. FHA and VA appraisers check condition, not only value, so a peeling-paint or roof problem can stop a closing. Seller financing needs different documents. If a buyer says "I will use a bridge loan," the broker should point to the contract's loan and financing dates and tell the buyer to talk to the lender early.