New Jersey Real Estate Salesperson · Real Estate Finance
Mortgage Loan Types and Financing
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In 30 seconds
Loan types differ by who stands behind the lender's risk, how the rate behaves, and what property the loan covers. The most tested distinction is assumption versus subject-to: in an assumption the buyer becomes personally liable on the note, while a subject-to purchase leaves the original seller liable.
Why this matters
The exam tests whether you know who backs each loan and who stays liable when a buyer takes over an existing mortgage, two details licensees routinely mix up.
The college version
In normal terms
- Conventional loans have no government backing; FHA loans are government-insured, VA loans are government-guaranteed, and USDA loans serve eligible rural borrowers.
- Fixed-rate loans keep one rate for the whole term, while adjustable-rate loans move with an index; interest-only, construction, bridge, blanket, and package loans are shaped for special situations.
- When the seller helps finance, the tools are purchase-money mortgages, seller financing, assumption, or buying subject-to, and the liability question decides which one is in play.
Concepts in this outline
- Conventional loans — loans with no government insurance or guarantee; the lender bears the full default risk.
- Conforming loans — conventional loans that meet the purchase guidelines of the government-sponsored secondary-market buyers.
- Nonconforming loans — loans that exceed the conforming size limit (jumbo) or miss other guidelines.
- FHA-insured loans — government-insured loans that let qualified borrowers buy with a lower down payment.
- VA-guaranteed loans — loans partially guaranteed by the Department of Veterans Affairs for eligible veterans, often with no down payment.
- USDA/Rural Development loans — government-backed loans for eligible borrowers buying in designated rural areas.
- Fixed-rate mortgages — the interest rate and payment stay the same for the entire loan term.
- Adjustable-rate mortgages — the rate changes periodically based on an index plus a margin, often with caps.
- Interest-only loans — the borrower pays only interest for a set period, so principal does not shrink.
- Construction loans — short-term financing advanced in draws as building progresses; usually replaced by permanent financing.
- Bridge loans — short-term loans covering the gap between buying a new property and selling the current one.
- Blanket loans — one mortgage covering several parcels, typically with a partial release clause freeing lots as they sell.
- Package loans — a loan secured by real property plus included personal property, such as furnishings or appliances.
- Purchase-money mortgages — a mortgage the buyer gives at purchase, often to the seller, to finance part of the price.
- Seller financing — the seller acts as lender, taking back a note and mortgage instead of full cash.
- Assumption of mortgage — the buyer takes over the seller's loan and becomes personally liable on the note.
- Subject-to financing — the buyer takes title and makes payments, but the seller stays personally liable on the note.
Eli explains
The same idea, in plain words
Explain it like I’m 10
Lenders sort loans by who covers their losses. A conventional loan has no government backing. If it fits the rules of the big secondary-market buyers (see Topic 04), it is a conforming loan; otherwise it is nonconforming. An FHA-insured loan is insured by the Federal Housing Administration, protecting the lender. A VA-guaranteed loan is backed by the Department of Veterans Affairs for eligible veterans. A USDA loan helps buyers in eligible rural areas.
Loans also differ in how the rate behaves. A fixed-rate mortgage locks one rate for the whole term. An adjustable-rate mortgage ties the rate to an index, so payments can rise or fall. An interest-only loan defers principal. A construction loan funds building in stages, and a bridge loan bridges buying a new home and selling the old one. A blanket loan covers several parcels with a partial release clause freeing lots as they sell. A package loan adds personal property like appliances.
When the seller helps, watch liability. Under assumption, the buyer becomes personally liable; subject-to leaves the seller liable.
Worked example
Dana is selling her Belmar Shore rental to Marcus, and her existing loan carries a low fixed rate. Marcus asks to take it over. The lender agrees to a formal assumption: Marcus signs, qualifies, and becomes personally liable for the note, and Dana asks for a release so she is off the hook. Had Marcus simply bought subject to the mortgage, he would make the payments but Dana would remain liable if he stopped, and the lender's due-on-sale clause (see Topic 04) could have called the loan. Because Marcus is short on cash, Dana also takes back a small purchase-money mortgage for part of the price, making her a lender on a second lien.
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