General Mortgage Knowledge
Loan Types and Terms
Candidates must distinguish conventional, FHA, VA, and USDA loans, and know basic amortization. Fixed-rate loans have constant principal-and-interest payments; adjustable-rate mortgages (ARMs) have an initial fixed period, then adjust by an index plus margin, subject to caps (initial, periodic, lifetime).
Key Concepts
- PITI: principal, interest, taxes, insurance-the full monthly housing payment.
- LTV: loan amount divided by appraised value or sales price, whichever is lower.
- PMI: usually required on conventional loans above 80% LTV; FHA uses mortgage insurance premium (MIP).
- Escrow/impounds: funds collected for taxes and insurance.
- Points: prepaid interest; one point equals 1% of the loan amount.
- DTI: total monthly debt divided by gross monthly income.
Traps
Questions often test whether you use sales price or appraised value for LTV-use the lower. Another trap conflates the interest rate with the APR; APR includes fees. Watch for ARM cap questions that ask for the lifetime maximum, not the next adjustment.
Worked Example
A home sells for $300,000 and appraises at $290,000. The loan is $261,000. LTV = $261,000 ÷ $290,000 = 90%. Because LTV exceeds 80%, PMI likely applies. This shows why the lower value governs.
Rule of Thumb
If two values are given, the lender uses the lesser for LTV. If a question asks about total cost of credit, think APR, not note rate.